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SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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FORM 10-Q



(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



| | For the quarterly period ended September 30, 2003
| | -------------------------------------------------



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------



| | For the transition period from  to
| | ----------------------------------



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ARMSTRONG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



|Pennsylvania                                                   |  | 000-50408              |  | 23-3033414                          
|-------------------------------------------------------------- |  | ---------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | Commission file number |  | (I.R.S. Employer Identification No.)



|P. O. Box 3001, Lancaster, Pennsylvania  |  | 17604     
|---------------------------------------- |  | ----------
|(Address of principal executive offices) |  | (Zip Code)



Registrants
telephone number, including area code (717) 397-0611



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ARMSTRONG WORLD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



|Pennsylvania                                                   |  | 1-2116                 |  | 23-0366390                          
|-------------------------------------------------------------- |  | ---------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | Commission file number |  | (I.R.S. Employer Identification No.)



|P. O. Box 3001, Lancaster, Pennsylvania  |  | 17604     
|---------------------------------------- |  | ----------
|(Address of principal executive offices) |  | (Zip Code)



Registrants
telephone number, including area code (717) 397-0611



---



Armstrong World Industries, Inc. meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is
therefore participating in the filing of this form in the reduced disclosure format permitted by such Instructions.



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act).    Yes ̈No  x



Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Number of shares of Armstrong Holdings, Inc.s common stock outstanding as of October 16, 2003 - 40,668,892.



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##### Table of Contents

TABLE OF CONTENTS



|SECTION                        |  |                                                                                       |  | PAGES  
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | -------
|Cautionary Factors             |  | 3  4                                                                                
|                               | 
|PART I  FINANCIAL INFORMATION |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Condensed Consolidated Financial Statements                                           |  |        
|                               |  | Armstrong Holdings, Inc., and Subsidiaries                                            |  | 5  28 
|                               |  | Independent Accountants Review Report                                                |  | 29     
|                               |  | Armstrong World Industries, Inc., and Subsidiaries                                    |  | 30  53
|                               |  |                                                                                      
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 54  68
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 69     
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 69     
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 70  76
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                      |  | 77  78
|                               | 
|Signatures                     |  | 79                                                                                   



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Cautionary Factors That May Affect Future Results



(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)



The disclosures and analysis in this report contain some forward-looking statements. This discussion about those statements is provided in accordance with the Private Securities Litigation Reform Act of 1995.



Forward-looking statements give current expectations or forecasts of future
events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as anticipate, estimate, expect, project, intend,
plan, believe, and other words and terms of similar meaning in connection with discussions of future operating or financial performance. In particular, these include statements relating to future actions, prospective
products, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. From time to time, we may also provide oral or written
forward-looking statements in other materials released to the public.



Any or
all of the forward-looking statements made in this report and in any other public statements may turn out to be incorrect. They can be affected by inaccurate assumptions we may make or by known or unknown risks and uncertainties. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary materially. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. However, you should
consult any further disclosures we make on related subjects in Forms 10-Q, 8-K, 10-K or other reports filed with the SEC. Other factors besides those listed here could also adversely affect our businesses.



These are some of the factors that could potentially cause actual results to differ
materially from expected and historical results:



Chapter 11 Filing



| | Factors relating to Armstrong World Industries, Inc.s (AWI) Chapter 11 Filing, such as: the possible disruption of relationships with creditors, customers,
suppliers and employees; the ultimate size of AWIs asbestos-related and other liabilities; the ability to confirm and implement a plan of reorganization; the availability of financing and refinancing for both AWI and its subsidiaries that are
not parties to its Chapter 11 Filing; and AWIs ability to comply with covenants in its debtor-in-possession credit facility (the DIP Facility).
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Legal Claims



| | Claims of undetermined merit and amount which have been asserted against us for various legal matters, including AWIs asbestos related litigation. For more information on
these matters, see the discussion of Legal Proceedings in Part II, Item 1 in this report.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Business Environment



| | Changes in demand for public and private commercial and residential building construction and renovation, laws and regulations, foreign currency and interest rates, inflation or
other related factors affecting our businesses. Despite our efforts to foresee and plan for the effects of changes in these circumstances, we can not predict their impact with certainty. For example, economic weakness can lead customers to delay or
cancel construction plans or could lead to further industry overcapacity. For more information on these matters, see the discussion of Market Risk in Item 7A of Armstrong Holdings, Inc. 2002 Form 10-K.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Business combinations among our competitors or suppliers, which could affect our competitive position in any of our business units. Similarly, combinations or alliances among our
major customers could increase their purchasing power in dealing with us. If we should enter into one or more business combinations, our business, finances and capital structure could be affected.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The level of success of our new product introductions and those of our competitors.
|- | -----------------------------------------------------------------------------------



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| | The extent to which we successfully achieve integration of and synergies from acquisitions as well as the impact of divestitures, restructuring and other unusual items that may
result from evolving business strategies and organizational restructuring.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Retail Environment



| | Business decisions and business conditions that affect our major customers and distribution networks. For example, a significant portion of our revenue in North America comes from
sales to major home center retailers.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Increased retail trade consolidation, especially in markets such as the United States, could make us more dependent upon key retailers whose relative bargaining strength may
increase.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Changes in the policies and marketing strategies of our retail trade customers, such as inventory shifts or fluctuations, limitations on access to shelf space and other conditions.
Many of our customers, particularly major home center retailers, have engaged with us in continuous efforts to reduce their inventory levels and improve delivery fulfillment.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



International



| | Various worldwide economic and political factors, changes in the competitive structures of the markets, credit risks in emerging markets, variations in residential and commercial
construction rates, and economic growth rates in various areas of the world in which we do business. These factors could affect the end-use markets for our products in various parts of the world.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Changes in intellectual property legal protections and remedies, trade regulations, tariff classifications or duty rates, and procedures and actions affecting production, pricing
and marketing of products, intergovernmental disputes, possible nationalization and unstable governments and legal systems.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Changes in exchange rates can significantly affect our reported results from one period to the next.
|- | ----------------------------------------------------------------------------------------------------



Raw Materials



| | Availability of raw materials, energy, water and sourced products due to changes in business and legal conditions that impact our suppliers, including environmental conditions, laws
and regulations, litigation involving our suppliers, transportation disruptions and/or business decisions made by our suppliers.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Raw material price increases (for example price increases in hardwood lumber, limestone or petroleum-based raw materials such as plasticizers or PVCs), energy cost increases (for
example price increases in natural gas), and changes in transportation costs.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

PART I  FINANCIAL INFORMATION

Item 1. Financial Statements



Armstrong Holdings, Inc., and Subsidiaries

Condensed Consolidated Statements of Earnings

(amounts in millions, except per share amounts)

Unaudited



|                                                                                                         |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | -
|                                                                                                         |  | 2003                             |       |   | 2002                            |  
|Net sales                                                                                                |  | $                                | 851.4 |   |                                 | $
|Cost of goods sold                                                                                       |  |                                  | 677.9 |   |                                 |  
|                                                                                                         |  |                                  |       |   |                                 |  
|Gross profit                                                                                             |  |                                  | 173.5 |   |                                 |  
|                                                                                                         |  |                                  |       |  
|Selling, general and administrative expenses                                                             |  |                                  | 151.1 |   |                                 |  
|Charge for asbestos liability, net                                                                       |  |                                  | 8.0   |   |                                 |  
|Restructuring and reorganization charges (reversals), net                                                |  |                                  | 2.7   |   |                                 |  
|Equity (earnings) from affiliates, net                                                                   |  |                                  | (6.1  | ) |                                 |  
|                                                                                                         |  |                                  |       |   |                                 |  
|Operating income (loss)                                                                                  |  |                                  | 17.8  |   |                                 |  
|                                                                                                         |  |                                  |       |  
|Interest expense (unrecorded contractual interest of $24.9, $24.9, $74.4 and $74.4, respectively)        |  |                                  | 2.7   |   |                                 |  
|Other non-operating expense                                                                              |  |                                  | 4.5   |   |                                 |  
|Other non-operating (income)                                                                             |  |                                  | (1.0  | ) |                                 |  
|Chapter 11 reorganization costs, net                                                                     |  |                                  | 6.3   |   |                                 |  
|                                                                                                         |  |                                  |       |   |                                 |  
|Earnings (loss) before income taxes and cumulative effect of a change in accounting principle            |  |                                  | 5.3   |   |                                 |  
|                                                                                                         |  |                                  |       |  
|Income tax expense                                                                                       |  |                                  | 10.0  |   |                                 |  
|                                                                                                         |  |                                  |       |   |                                 |  
|Earnings (loss) before cumulative effect of a change in accounting principle                             |  |                                  | (4.7  | ) |                                 |  
|                                                                                                         |  |                                  |       |  
|Cumulative effect of a change in accounting principle, net of tax of $2.2                                |  |                                  |      |   |                                 |  
|                                                                                                         |  |                                  |       |   |                                 |  
|Net earnings (loss)                                                                                      |  | $                                | (4.7  | ) |                                 | $
|                                                                                                         |  |                                  |       |   |                                 |  
|Earnings (loss) per share of common stock, before cumulative effect of a change in accounting principle: |  |                                  |       |   |                                 |  
|Basic                                                                                                    |  | $                                | (0.12 | ) |                                 | $
|Diluted                                                                                                  |  | $                                | (0.12 | ) |                                 | $
|                                                                                                         |  |                                  |       |  
|Loss per share of common stock, cumulative effect of a change in accounting principle:                   |  |                                  |       |   |                                 |  
|Basic                                                                                                    |  | $                                |      |   |                                 | $
|Diluted                                                                                                  |  | $                                |      |   |                                 | $
|                                                                                                         |  |                                  |       |  
|Net earnings (loss) per share of common stock:                                                           |  |                                  |       |   |                                 |  
|Basic                                                                                                    |  | $                                | (0.12 | ) |                                 | $
|Diluted                                                                                                  |  | $                                | (0.12 | ) |                                 | $
|                                                                                                         |  |                                  |       |  
|Average number of common shares outstanding:                                                             |  |                                  |       |   |                                 |  
|Basic                                                                                                    |  |                                  | 40.5  |   |                                 |  
|Diluted                                                                                                  |  |                                  | 40.7  |   |                                 |  



See accompanying notes to condensed
consolidated financial statements beginning on page 9.



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Armstrong Holdings, Inc., and Subsidiaries

Condensed Consolidated Balance Sheets

(amounts in millions, except share data)



|                                                                                                                     |  | Unaudited September 30, 2003 |          |   | December 31, 2002 |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ----------------- | -
|Assets                                                                                                               |  |                              |          |   |                   |  
|Current Assets:                                                                                                      |  |                              |          |   |                   |  
|Cash and cash equivalents                                                                                            |  | $                            | 425.9    |   |                   | $
|Accounts and notes receivable, net                                                                                   |  |                              | 377.8    |   |                   |  
|Inventories, net                                                                                                     |  |                              | 461.1    |   |                   |  
|Deferred income taxes                                                                                                |  |                              | 17.3     |   |                   |  
|Other current assets                                                                                                 |  |                              | 84.9     |   |                   |  
|                                                                                                                     |  |                              |          |   |                   |  
|Total current assets                                                                                                 |  |                              | 1,367.0  |   |                   |  
|                                                                                                                     |  |                             
|Property, plant and equipment, less accumulated depreciation and amortization of $1,383.6 and $1,263.8,
respectively |  |                              | 1,257.7  |   |                   |  
|                                                                                                                     |  |                             
|Insurance receivable for asbestos-related liabilities, noncurrent                                                    |  |                              | 95.1     |   |                   |  
|Prepaid pension costs                                                                                                |  |                              | 447.0    |   |                   |  
|Investment in affiliates                                                                                             |  |                              | 49.7     |   |                   |  
|Goodwill, net                                                                                                        |  |                              | 237.3    |   |                   |  
|Other intangibles, net                                                                                               |  |                              | 81.0     |   |                   |  
|Deferred income taxes, noncurrent                                                                                    |  |                              | 901.3    |   |                   |  
|Other noncurrent assets                                                                                              |  |                              | 108.3    |   |                   |  
|                                                                                                                     |  |                              |          |   |                   |  
|Total assets                                                                                                         |  | $                            | 4,544.4  |   |                   | $
|                                                                                                                     |  |                              |          |   |                   |  
|Liabilities and Shareholders Equity                                                                                 |  |                              |          |   |                   |  
|Current liabilities:                                                                                                 |  |                              |          |   |                   |  
|Short-term debt                                                                                                      |  | $                            | 5.0      |   |                   | $
|Current installments of long-term debt                                                                               |  |                              | 8.4      |   |                   |  
|Accounts payable and accrued expenses                                                                                |  |                              | 348.9    |   |                   |  
|Income taxes                                                                                                         |  |                              | 57.3     |   |                   |  
|                                                                                                                     |  |                              |          |   |                   |  
|Total current liabilities                                                                                            |  |                              | 419.6    |   |                   |  
|                                                                                                                     |  |                             
|Liabilities subject to compromise                                                                                    |  |                              | 4,868.3  |   |                   |  
|                                                                                                                     |  |                             
|Long-term debt, less current installments                                                                            |  |                              | 41.6     |   |                   |  
|Postretirement and postemployment benefit liabilities                                                                |  |                              | 259.5    |   |                   |  
|Pension benefit liabilities                                                                                          |  |                              | 204.2    |   |                   |  
|Other long-term liabilities                                                                                          |  |                              | 82.2     |   |                   |  
|Deferred income taxes                                                                                                |  |                              | 17.7     |   |                   |  
|Minority interest in subsidiaries                                                                                    |  |                              | 9.6      |   |                   |  
|                                                                                                                     |  |                              |          |   |                   |  
|Total noncurrent liabilities                                                                                         |  |                              | 5,483.1  |   |                   |  
|                                                                                                                     |  |                             
|Shareholders equity (deficit):                                                                                      |  |                              |          |   |                   |  
|Common stock, $1 par value per share Authorized 200 million shares; issued 51,878,910 shares                         |  |                              | 51.9     |   |                   |  
|Capital in excess of par value                                                                                       |  |                              | 168.1    |   |                   |  
|Reduction for ESOP loan guarantee                                                                                    |  |                              | (142.2   | ) |                   |  
|Accumulated deficit                                                                                                  |  |                              | (935.6   | ) |                   |  
|Accumulated other comprehensive income (loss)                                                                        |  |                              | 12.8     |   |                   |  
|Less common stock in treasury, at cost 2003  11,210,018 shares; 2002  11,201,326 shares                            |  |                              | (513.3   | ) |                   |  
|                                                                                                                     |  |                              |          |   |                   |  
|Total shareholders deficit                                                                                          |  |                              | (1,358.3 | ) |                   |  
|                                                                                                                     |  |                              |          |   |                   |  
|Total liabilities and shareholders equity                                                                           |  | $                            | 4,544.4  |   |                   | $
|                                                                                                                     |  |                              |          |   |                   |  



See
accompanying notes to condensed consolidated financial statements beginning on page 9.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Condensed Consolidated Statements of Shareholders Equity

(amounts in millions,
except per share amounts)

Unaudited



|                                               |  | 2003 |          |   | 2002 |  
|---------------------------------------------- |  | ---- | -------- | - | ---- | -
|Common stock, $1 par value:                    |  |      |          |   |      |  
|Balance at beginning of year and September 30  |  | $    | 51.9     |   |      |  
|                                               |  |      |          |   |      |  
|Capital in excess of par value:                |  |      |          |   |      |  
|Balance at beginning of year                   |  | $    | 167.6    |   |      |  
|Stock issuances and other                      |  |      | 0.5      |   |      |  
|                                               |  |      |          |   |      |  
|Balance at September 30                        |  | $    | 168.1    |   |      |  
|                                               |  |      |          |   |      |  
|Reduction for ESOP loan guarantee:             |  |      |          |   |      |  
|Balance at beginning of year and September 30  |  | $    | (142.2   | ) |      |  
|                                               |  |      |          |   |      |  
|Retained earnings (accumulated deficit):       |  |      |          |   |      |  
|Balance at beginning of year                   |  | $    | (898.5   | ) |      |  
|Net (loss) for nine months                     |  |      | (37.1    | ) |      | $
|                                               |  |      |          |   |      |  
|Balance at September 30                        |  | $    | (935.6   | ) |      |  
|                                               |  |      |          |   |      |  
|Accumulated other comprehensive income (loss): |  |      |          |   |      |  
|Balance at beginning of year                   |  | $    | (12.2    | ) |      |  
|Foreign currency translation adjustments       |  |      | 28.7     |   |      |  
|Derivative (loss) gain, net                    |  |      | (2.1     | ) |      |  
|Minimum pension liability adjustments          |  |      | (1.6     | ) |      |  
|                                               |  |      |          |   |      |  
|Total other comprehensive income               |  |      | 25.0     |   |      |  
|                                               |  |      |          |   |      |  
|Balance at September 30                        |  | $    | 12.8     |   |      |  
|                                               |  |      |          |   |      |  
|Comprehensive (loss)                           |  |      |          |   |      | $
|                                               |  |      |          |   |      |  
|Less treasury stock at cost:                   |  |      |          |   |      |  
|Balance at beginning of year and September 30  |  | $    | (513.3   | ) |      |  
|                                               |  |      |          |   |      |  
|Total shareholders equity (deficit)           |  | $    | (1,358.3 | ) |      |  
|                                               |  |      |          |   |      |  



See
accompanying notes to condensed consolidated financial statements beginning on page 9.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

Unaudited



|                                                                                                |  | Nine Months Ended September 30, |      
|----------------------------------------------------------------------------------------------- |  | ------------------------------- | -----
|                                                                                                |  | 2003                            |      
|Cash flows from operating activities:                                                           |  |                                 |      
|Net (loss)                                                                                      |  | $                               | (37.1
|Adjustments to reconcile net (loss) to net cash provided by operating activities:               |  |                                 |      
|Cumulative effect of change in accounting principle, net                                        |  |                                 |     
|Depreciation and amortization                                                                   |  |                                 | 129.9
|Deferred income taxes                                                                           |  |                                 | (35.6
|Equity (earnings) from affiliates, net                                                          |  |                                 | (17.5
|Chapter 11 reorganization costs, net                                                            |  |                                 | 16.2 
|Chapter 11 reorganization costs payments                                                        |  |                                 | (19.6
|Restructuring and reorganization charges, net of reversals                                      |  |                                 | 6.8  
|Restructuring and reorganization payments                                                       |  |                                 | (3.4 
|Asbestos-related insurance recoveries                                                           |  |                                 | 23.0 
|Payments for asbestos related claims                                                            |  |                                 | (9.0 
|Charge for asbestos liability, net                                                              |  |                                 | 81.0 
|Cash effect of hedging activities                                                               |  |                                 | (9.7 
|Changes in operating assets and liabilities net of effects of reorganizations and restructuring |  |                                 |      
|(Increase) in receivables                                                                       |  |                                 | (32.8
|(Increase)/decrease in inventories                                                              |  |                                 | (13.3
|(Increase) in other current assets                                                              |  |                                 | (0.7 
|(Increase) in other noncurrent assets                                                           |  |                                 | (11.2
|Increase/(decrease) in accounts payable and accrued expenses                                    |  |                                 | (14.4
|Increase in income taxes payable                                                                |  |                                 | 31.1 
|Increase in other long-term liabilities                                                         |  |                                 | 6.5  
|Other, net                                                                                      |  |                                 | 0.4  
|                                                                                                |  |                                 |      
|Net cash provided by operating activities                                                       |  |                                 | 90.6 
|                                                                                                |  |                                 |      
|Cash flows from investing activities:                                                           |  |                                 |      
|Purchases of property, plant and equipment and computer software                                |  |                                 | (55.6
|Distributions from equity affiliates                                                            |  |                                 | 12.0 
|Proceeds from the sale of assets                                                                |  |                                 | 1.8  
|                                                                                                |  |                                 |      
|Net cash (used for) investing activities                                                        |  |                                 | (41.8
|                                                                                                |  |                                 |      
|Cash flows from financing activities:                                                           |  |                                 |      
|Increase/(decrease) in short-term debt, net                                                     |  |                                 | (3.8 
|Payments of long-term debt                                                                      |  |                                 | (3.1 
|Other, net                                                                                      |  |                                 | (0.6 
|                                                                                                |  |                                 |      
|Net cash (used for) financing activities                                                        |  |                                 | (7.5 
|                                                                                                |  |                                 |      
|Effect of exchange rate changes on cash and cash equivalents                                    |  |                                 | 4.6  
|                                                                                                |  |                                 |      
|Net increase in cash and cash equivalents                                                       |  | $                               | 45.9 
|Cash and cash equivalents at beginning of year                                                  |  |                                 | 380.0
|                                                                                                |  |                                 |      
|Cash and cash equivalents at end of period                                                      |  | $                               | 425.9
|                                                                                                |  |                                 |      



See
accompanying notes to condensed consolidated financial statements beginning on page 9.



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##### Table of Contents

Armstrong Holdings, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements



NOTE 1. BASIS OF PRESENTATION



Armstrong World Industries, Inc. (AWI) is a Pennsylvania corporation incorporated in 1891, which together with its subsidiaries is referred to here as
Armstrong. Through its U.S. operations and U.S. and international subsidiaries, Armstrong designs, manufactures and sells flooring products (resilient, wood, carpeting and sports flooring) as well as ceiling systems, around the world.
Armstrong products are sold primarily for use in the finishing, refurbishing and repair of residential, commercial and institutional buildings. Armstrong also designs, manufactures and sells kitchen and bathroom cabinets to single and multi-family
homebuilders and remodelers.



Armstrong Holdings, Inc. (which together with its
subsidiaries is referred to here as AHI) is the publicly held parent holding company of Armstrong. Armstrong Holdings, Inc. became the parent company of Armstrong on May 1, 2000, following AWI shareholder approval of a plan of exchange
under which each share of AWI was automatically exchanged for one share of Armstrong Holdings, Inc. Armstrong Holdings, Inc. was formed for purposes of the share exchange and holds no other significant assets or operations apart from AWI and
AWIs subsidiaries. Stock certificates that formerly represented shares of AWI were automatically converted into certificates representing the same number of shares of Armstrong Holdings, Inc. The publicly held debt of AWI was not affected in
the transaction.



The accounting policies used in preparing these statements
are the same as those used in preparing AHIs consolidated financial statements for the year ended December 31, 2002, which includes the accounts of AHI and its majority-owned subsidiaries. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and notes thereto included in AHIs Form 10-K for the fiscal year ended December 31, 2002. In the opinion of management, all adjustments of a normal recurring nature have
been included to provide a fair statement of the results for the reporting periods presented. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the
possibility of changes in general economic conditions.



Operating results for
the third quarter and nine months of 2003 and the corresponding periods of 2002 included in this report are unaudited. However, these condensed consolidated financial statements have been reviewed by independent public accountants in accordance with
established professional standards and procedures for a limited review of interim financial information. Certain prior year amounts have been reclassified to conform to the current year presentation.



Effective January 1, 2003, AHI adopted SFAS No. 143, Accounting for Asset Retirement
Obligations, which provides guidance on the accounting and disclosure for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. AHIs current results of operations and
financial position have not been affected.



Effective January 1, 2003, AHI
adopted SFAS No. 146, Accounting for Costs Associated with Exit of Disposal Activities, which addresses accounting for restructuring and similar costs. This standard affects the timing of expenses associated with restructurings, but is
not expected to change the long-term results of operations and financial position.



Effective July 1, 2003, AHI adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which addresses accounting for certain financial instruments with
characteristics of both liabilities and equity. AHIs current results of operations and financial position have not been affected.



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Effective January 1, 2003, AHI adopted Emerging Issues Task Force (EITF) Issue No. 02-16, Accounting by
a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, which provides guidance on the accounting for consideration received from a vendor. AHIs current results of operations and financial position have not
been affected.



In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The disclosure requirements were adopted December 31, 2002. The recognition and initial measurement
provisions were adopted January 1, 2003. AHIs current results of operations and financial position have not been affected.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. The requirements for variable interest entities created
after January 31, 2003 were adopted on February 1, 2003. AHIs current results of operations and financial position have not been affected. The FASB deferred the effective date of the requirements for existing variable interest entities until
the fourth quarter of 2003. While AHI is finalizing its review, adoption in the fourth quarter of 2003 is not anticipated to have an impact on AHIs consolidated results of operations or financial position.



NOTE 2. STOCK-BASED COMPENSATION



Effective December 31, 2002, AHI adopted SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which requires the following disclosure in annual and interim reports. The following table illustrates the effect on net income and earnings per share if AHI had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-based Compensation, to stock-based employee compensation.



|(amounts in millions)                                                                                                                       |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | -
|                                                                                                                                            |  | 2003                             |       |   | 2002                            |  
|Net income (loss), as reported                                                                                                              |  | $                                | (4.7  | ) |                                 | $
|Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax
effects                           |  |                                  |      |   |                                 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of
related tax effects |  |                                  |      |   |                                 |  
|                                                                                                                                            |  |                                  |       |   |                                 |  
|Pro forma net income (loss)                                                                                                                 |  | $                                | (4.7  | ) |                                 | $
|                                                                                                                                            |  |                                  |       |   |                                 |  
|Earnings (loss) per share:                                                                                                                  |  |                                  |       |   |                                 |  
|Basic  as reported                                                                                                                         |  | $                                | (0.12 | ) |                                 | $
|Basic  pro forma                                                                                                                           |  | $                                | (0.12 | ) |                                 | $
|                                                                                                                                            |  |                                  |       |  
|Diluted  as reported                                                                                                                       |  | $                                | (0.12 | ) |                                 | $
|Diluted  pro forma                                                                                                                         |  | $                                | (0.12 | ) |                                 | $



NOTE 3. CHAPTER 11
REORGANIZATION



On December 6, 2000, AWI, the major operating subsidiary
of AHI, filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S. Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (the Court) in order
to use the court-supervised reorganization process to achieve a resolution of the AWI asbestos liability. Also filing under Chapter 11 were two of Armstrongs wholly-owned subsidiaries, Nitram Liquidators, Inc. (Nitram) and Desseaux
Corporation of North America, Inc. (Desseaux, and together with AWI and Nitram, the Debtors). The Chapter 11 cases are being jointly administered under case numbers 00-4469, 00-4470, and 00-4471 (the Chapter 11
Case).



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AHI, and Armstrongs other subsidiaries, including Triangle Pacific Corp. (now Armstrong Wood Products Inc.), WAVE
(Armstrongs ceiling grid systems joint venture with Worthington Industries), Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating subsidiaries were not a part of the Filing. Asbestos-related claims against any of these
non-debtor entities are not addressed in the Chapter 11 proceedings unless they are personal injury derivative liabilities of AWI.



AWI is operating its business and managing its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant to the provisions of the
Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date (prepetition claims) unless specifically authorized by the Court. Similarly, claimants may not enforce any claims against AWI that arose
prior to the date of the Filing unless specifically authorized by the Court. In addition, as a debtor-in-possession, AWI has the right, subject to the Courts approval, to assume or reject any executory contracts and unexpired leases in
existence at the date of the Filing. Parties having claims as a result of any such rejection may file claims with the Court, which will be dealt with as part of the Chapter 11 Case.



Three creditors committees, one representing asbestos personal injury claimants (the Asbestos Personal Injury Claimants
Committee), one representing asbestos property damage claimants (the Asbestos Property Damage Committee), and the other representing other unsecured creditors (the Unsecured Creditors Committee), were appointed in
the Chapter 11 Case. Based on the settlement of all remaining asbestos-related property damage claims as described below, the Asbestos Property Damage Committee has been disbanded. In addition, an individual has been appointed to represent the
interests of future asbestos personal injury claimants (the Future Claimants Representative). In accordance with the provisions of the Bankruptcy Code, these parties have the right to be heard on matters that come before the Court
in the Chapter 11 Case.



Plan of
Reorganization



On November 4, 2002, AWI filed a Plan of Reorganization
with the Court. AWI has since filed several amended plans of reorganization with the Court, along with selected exhibits. The fourth amended Plan of Reorganization, with certain exhibits, was filed on May 23, 2003 (as so amended, it is referred to
in this report as the POR). The POR has been endorsed by AHIs Board of Directors and is supported by the Asbestos Personal Injury Claimants Committee, the Unsecured Creditors Committee and the Future Claimants
Representative. The POR provides for AWI to continue to conduct its existing lines of business with a reorganized capital structure, under which, among other things, its existing shares will be cancelled and new common shares and notes will be
issued to its unsecured creditors and to a trust to be established under the POR for the benefit of AWIs current and future asbestos personal injury claimants, in full satisfaction of their claims against AWI, as further discussed below. The
POR excludes Armstrongs Nitram and Desseaux subsidiaries.



The POR was
mailed to creditors for voting in June 2003. The Court extended the deadline for creditors to vote on the POR from September 22, 2003 to October 31, 2003. The Court received 17 objections to the POR from creditors by the September 22, 2003 deadline.
AWI has resolved or filed responses to these objections and believes that many of these objections will be addressed prior to the Confirmation hearing. Technical modifications to the fourth amended Plan of Reorganization were filed on October 17,
2003.



Implementation of the POR and the treatment of claims and interests as
provided therein are subject to confirmation of the POR in accordance with the provisions of the Bankruptcy Code. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. See Next Steps in the Chapter 11
Process section for further discussion.



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##### Table of Contents

Disclosure Statement



On December 20, 2002, a proposed disclosure statement with respect to the POR was filed with
the Court. On December 26, 2002, AWI filed projected financial information with the Court as an exhibit to the disclosure statement (therein known as Exhibit C). Following various amendments, on May 30, 2003, the Court approved the
Disclosure Statement (as so amended, it is referred to in this report as the Disclosure Statement) and it was distributed by AWI with the POR for creditor voting on the POR in June 2003.



As indicated in the Disclosure Statement and its exhibits, the projected financial
information and various estimates of value therein discussed (as previously submitted or as to be revised) should not be regarded as representations or warranties by AWI, AHI or any other person as to the accuracy of such information or that any
such projection or valuation will be realized. The information in the Disclosure Statement, including the projected financial information and estimates of value, was prepared by AWI and its financial advisors. This information has not been audited
or reviewed by independent accountants. The Disclosure Statement discusses the significant assumptions used in preparation of the projected financial information and estimates of value.



The discussions of the POR and Disclosure Statement in this report are qualified by reference to the full text of those documents as filed
with the Court and filed for reference purposes with the Securities and Exchange Commission. The POR and Disclosure Statement are available at www.armstrongplan.com, where additional information will be posted as it becomes available.



Asbestos Personal Injury Trust



A principal feature of the POR is the creation of a trust (the Asbestos
PI Trust), pursuant to section 524(g) of the Bankruptcy Code, to which all AWI present and future asbestos-related personal injury claims, including contribution claims of co-defendants, will be channeled. In accordance with the 524(g)
injunction to be issued by the Court in connection with the confirmation of the POR, various entities will be protected from suit on account of AWI present and future asbestos-related personal injury claims. These entities include, among
others, AWI, reorganized AWI, AHI, AWIs affiliates, and their respective officers and directors. Claims resolution procedures to be utilized by the Asbestos PI Trust have been developed. These procedures will govern the allowance and payment
by the Asbestos PI Trust of these AWI present and future asbestos-related personal injury claims. The Asbestos PI Trust will be funded with AWIs rights to insurance providing coverage for asbestos-related personal injury claims, as well as a
share of cash, notes, and common stock to be issued under the POR to creditors, as described below.



Consideration to Be Distributed under the POR



The Asbestos PI Trust and the holders of unsecured claims will share in the POR consideration that is made up of the following components:



| |  | Available Cash, which is comprised of:
| | - | --------------------------------------



| |  | Cash available on the effective date of the POR after reserving up to $100 million to fund ongoing operations and making provisions for certain required payments under the POR,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Any cash drawn, at AWIs sole discretion, under an exit finance facility for the purpose of funding distributions under the POR, and
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| |  | Certain insurance proceeds related to environmental matters
| | - | -----------------------------------------------------------



However, proceeds received under any private offering of debt securities and/or secured term loan borrowings, shall be excluded from the determination of
Available Cash.



| |  | Plan Notes of reorganized AWI and/or net proceeds from any private offerings of debt securities, and
| | - | ----------------------------------------------------------------------------------------------------



| |  | Substantially all of the new common stock of reorganized AWI
| | - | ------------------------------------------------------------



The total amount of Plan Notes will be the greater of (i) $1.125 billion less Available Cash and (ii) $775 million. However, AWI will use reasonable efforts to issue one
or more private offerings of debt securities on, or as soon as practicable after, the Effective Date that would yield net proceeds at least equal to the amount of the Plan Notes prescribed by the Plan. If the private offerings are successful, the
Plan Notes



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would not be issued. If the offerings yield proceeds less than the amount of the Plan Notes prescribed by the Plan, AWI will issue Plan Notes equal to the
difference. The private offerings, if issued, will not be registered under the Securities Act of 1933 and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements. If only the Plan Notes
are issued, AWI expects to issue an aggregate amount of $775 million Plan Notes. These Plan Notes will consist of (i) a tranche of notes with a seven-year maturity and a fixed interest rate, (ii) a tranche of notes with a ten-year maturity and a
fixed interest rate and (iii) a tranche of floating rate notes with a maturity of not less than five years, but no more than ten years, structured in a manner similar to, and as liquid as, marketable bank debt which satisfy the requirements of the
POR and are on terms and conditions that are mutually satisfactory to AWI and the Asbestos PI Claimants Committee, the Future Claimants Representative, and, if unsecured claimants, other than convenience claimants, vote to accept the
POR, the Unsecured Creditors Committee.



The POR provides that unsecured
creditors, other than convenience creditors described below, will receive their pro rata share of:



| |  |  | 34.43% of the new common stock of reorganized AWI,
| | - |  | --------------------------------------------------



| |  |  | 34.43% of the first $1.05 billion of
| | - |  | ------------------------------------



| |  | Up to $300 million of Available Cash and
| | - | ----------------------------------------



| |  | The principal amount of each series of Plan Notes and/or net cash proceeds from any private debt offerings of debt securities.
| | - | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | 60% of the next $50 million of Available Cash and, if such Available Cash is less than $50 million, then 60% of each series of Plan Notes and/or net cash proceeds from any private
debt offerings of debt securities, in an amount equal to the difference between $50 million and the amount of such Available Cash, and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 34.43% of the remaining amount of Available Cash and each series of Plan Notes and/or net cash proceeds from any private debt offerings of debt securities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



The remaining amount of new common stock of reorganized AWI, Available Cash and Plan Notes
and/or net cash proceeds from any private debt offerings of debt securities will be distributed to the Asbestos PI Trust.



Under the POR, unsecured creditors whose claims (other than debt securities) are less than $10,000 or who elect to reduce their claims to $10,000 will be treated as
convenience creditors and will receive payment of 75% of their allowed claim amount in cash.



Under the POR, the existing equity interests in AWI will be cancelled. The POR provides for the distribution, with respect to existing equity, of warrants to purchase shares of reorganized AWI (the
Warrants). The terms of the Warrants are provided in an exhibit to the POR. The Warrants:



| |  |  | Would constitute 5% of the common stock of reorganized AWI on a fully diluted basis, upon exercise of all the Warrants;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Would have a scheduled 7-year exercisable term from the effective date of the POR; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Would contain an exercise price equal to 125% of the per share equity value of reorganized AWI, as agreed among the financial advisers for AWI, the Asbestos Personal Injury
Claimants Committee, the Unsecured Creditors Committee, and the Future Claimants Representative, as set forth in the Court-approved disclosure statement for the POR.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Warrants are estimated to have a value on the effective date of the POR of approximately
$35 million to $40 million. Whether any value will be realized from the Warrants will depend on circumstances after they are issued, particularly whether the market value of the reorganized AWIs new common stock reaches a value in excess of
the exercise price of the Warrants during the period that they may be exercised.



AHIs shareholders are not entitled to vote on the POR. However, AHIs shareholders have been sent a copy of the Disclosure Statement. If the POR is implemented, the only value that will be available to AHI shareholders is their
ratable share of the Warrants. AHI intends to distribute the Warrants to its shareholders if AHIs Plan of Dissolution (see discussion below) is approved by AHIs shareholders.



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Valuation of Reorganized AWI for Purposes of the POR



In the Disclosure Statement, which assumed an Effective Date of the POR of July 1, 2003, and
based on estimates of the fair value of reorganized AWI, the total value of consideration to be distributed to the Asbestos PI Trust, other than the asbestos product liability insurance policies, will be approximately $1.8 billion, and the total
value of consideration to be distributed to holders of allowed unsecured claims (other than convenience claims) will be approximately $0.9 billion. Based upon the estimated value of the POR consideration and AWIs estimate that unsecured claims
allowed by the Court (other than convenience claims) will total approximately $1.65 billion, AWI estimates that holders of allowed unsecured claims (other than convenience claims) will receive a recovery having a value equal to approximately 59.5%
of their allowed claims. AWIs estimates of the consideration and potential recoveries are based upon many assumptions, including:



| |  | The estimated reorganization value for AWI is between $2.4 billion and $3.0 billion (with a midpoint of $2.7 billion);
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | The estimated equity value of new common stock is between $24.66 and $35.30 per share with a midpoint of $30.00 per share (assuming a distribution of 56.4 million shares of new
common stock to holders of unsecured claims and the Asbestos PI Trust);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Plan Notes will be in the aggregate principal amount of $775 million and are worth their face value
| | - | -------------------------------------------------------------------------------------------------------



| |  | AWI expects to have Available Cash of approximately $350 million; and
| | - | ---------------------------------------------------------------------



| |  | The estimated value of the Warrants is between $35 million and $40 million
| | - | --------------------------------------------------------------------------



The estimated reorganization value was reduced from previously reported amounts based on revised projected financial information that incorporated updated economic
conditions.



AHIs Plan of
Dissolution, Winding Up and Distribution (Plan of Dissolution)



In connection with the consummation of the POR, the existing equity interests in AWI will be cancelled, the new common stock of reorganized AWI will be issued to AWIs unsecured creditors and the Asbestos PI Trust and the Warrants will
be issued to AHI (or a wholly-owned subsidiary of AHI). The Board of Directors of AHI has determined that it is not practicable for AHI to continue in operation as an on-going business owning the Warrants, which will then be AHIs only asset.
The POR contemplates, and the Board of Directors of AHI has approved and recommended, that AHI shareholders voluntarily dissolve AHI and adopt a plan for winding up its affairs in accordance with Pennsylvania law and, subject to completion of
AHIs winding up, distributing the Warrants to the shareholders. A special meeting of AHI shareholders has been called to vote on the Plan of Liquidation on December 3, 2003, and appropriate materials regarding such meeting have been sent to
AHIs shareholders. If the Plan of Dissolution is not approved by AHIs shareholders, AHI will not distribute the Warrants to AHIs shareholders and the Board of Directors will determine how to proceed under the circumstances. One
alternative in such event may be for AHI to seek involuntary dissolution by order of, and under the supervision of, a Pennsylvania court. The POR provides that reorganized AWI will pay costs and expenses incurred in connection with seeking AHI
shareholder approval of the Plan of Dissolution and, if so approved, of administering AHIs Plan of Dissolution. Reorganized AWI will otherwise have no responsibility for AHIs on-going costs.



Other Matters



In another companys asbestos-related Chapter 11 case, a motion for recusal has been
filed against Judge Alfred M. Wolin, who is jointly administering the asbestos issues in five companies Chapter 11 cases, including AWI. Judge Wolin has not yet ruled on the recusal motion. AWI is uncertain as to the merits of the motion, and
what impact, if any, this motion will have on AWIs Chapter 11 proceedings.



Next Steps in the Chapter 11 Process



Following the creditor voting, the Court will hold a hearing to consider confirmation of the POR. It is anticipated that such hearing will be on November 17 and 18, 2003.
If the Court confirms the POR in November, AWI could emerge from Chapter 11 protection as soon as the end of 2003. Of course, there can be no certainty that all such events will occur, or if they do, that they will occur in accordance with such
timeframes.



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##### Table of Contents

Common Stock and Debt Securities



As a result of AWI filing the Plan of Reorganization on November 4, 2002, the New York Stock
Exchange stopped trading on the Exchange of the common stock of AHI (traded under the ticker symbol ACK) and two debt securities of AWI (traded under the ticker symbols AKK and ACK 08). AHIs common stock has
resumed trading in the over-the-counter (OTC) Bulletin Board under the ticker symbol ACKHQ and one of AWIs debt securities has resumed trading under the ticker symbol AKKWQ.



Bar Date for Filing Claims



The Court established August 31, 2001 as the bar date for all claims against AWI except for
asbestos-related personal injury claims and certain other specified claims. A bar date is the date by which claims against AWI must be filed if the claimants wish to participate in any distribution in the Chapter 11 Case. The Court had extended the
bar date for claims from several environmental agencies until the third quarter of 2003. A bar date for asbestos-related personal injury claims (other than claims for contribution, indemnification, or subrogation) has been rendered unnecessary under
the terms of the POR, which defers such filings until the establishment of a trust to administer such claims.



Approximately 4,700 proofs of claim (including late-filed claims) totaling approximately $6.3 billion alleging a right to payment from AWI were filed with the Court in response to the August 31, 2001 bar date, which
are discussed below. AWI continues to investigate claims. The Court will ultimately determine liability amounts that will be allowed as part of the Chapter 11 process.



In its ongoing review of the filed claims, AWI has identified and successfully objected to approximately 2,000 claims totaling $2.1 billion.
These claims were primarily duplicate filings, claims that were subsequently amended or claims that are not related to AWI. The Court disallowed these claims with prejudice.



Approximately 1,000 proofs of claim totaling approximately $1.8 billion are pending with the Court that are associated with asbestos-related
personal injury litigation, including direct personal injury claims, claims by co-defendants for contribution and indemnification, and claims relating to AWIs participation in the Center for Claims Resolution (the Center). As
stated above, the bar date of August 31, 2001 did not apply to asbestos-related personal injury claims other than claims for contribution, indemnification, or subrogation. The POR contemplates that all AWI asbestos-related personal injury claims,
including claims for contribution, indemnification, or subrogation, will be addressed in the future pursuant to the procedures to be developed in connection with the POR. See further discussion regarding AWIs liability for asbestos-related
matters in Note 11.



During the first six months of 2003, AWI settled all of
the approximately 460 remaining property damage claims that alleged damages of $0.8 billion, for approximately $9 million. Payments to claimants were made during the third quarter of 2003 and were funded by insurance. See Note 10 for further
discussion of property damage litigation.



Approximately 1,200 claims totaling
approximately $1.6 billion alleging a right to payment for financing, environmental, trade debt and other claims are pending with the Court. For these categories of claims, AWI has previously recorded approximately $1.6 billion in liabilities. AWI
continues to investigate the claims to determine their validity.



AWI continues
to evaluate claims filed in the Chapter 11 Case. AWI has recorded liability amounts for claims whose value can be reasonably estimated and which it believes are probable of being allowed by the Court. During the fourth quarter of 2002, AWI recorded
a $2.5 billion charge to increase its estimate of probable asbestos-related liability for personal injury claims based on the developments in the Chapter 11 Case. See Note 11 for further discussion. At this time, it is impossible to reasonably
estimate the value of all the claims that will ultimately be allowed by the Court. However, it is likely the value of the claims ultimately allowed by the Court will be different than amounts presently recorded by AWI and could be material to
AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and make changes to the recorded liability if and when it is
appropriate.



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Financing



On November 1, 2002, the Court announced it had approved AWIs motion to reduce the amount of its debtor-in-possession credit facility
(the DIP Facility) from $200 million to $75 million, eliminate the revolving credit borrowing feature, retain the letter of credit issuance facility and extend the maturity date to December 8, 2003. On September 29, 2003, the Court
approved the extension of the maturity date of the DIP Facility to December 8, 2004. As of September 30, 2003, AWI had approximately $32.6 million in letters of credit which were issued pursuant to the DIP Facility. As of September 30, 2003, AWI had
$263.2 million of cash and cash equivalents, excluding cash held by its non-debtor subsidiaries. AWI believes that cash on hand and generated from operations and dividends from its subsidiaries, together with lines of credit and the DIP Facility,
will be adequate to address its foreseeable liquidity needs. Obligations under the DIP Facility, including reimbursement of draws under the letters of credit, if any, constitute superpriority administrative expense claims in the Chapter 11 Case.



Accounting Impact



AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization
under the Bankruptcy Code (SOP 90-7) provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code. This guidance is implemented in the accompanying consolidated financial statements.



Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities
that are subject to compromise and report them separately on the balance sheet. See Note 5 for detail of the liabilities subject to compromise at September 30, 2003 and December 31, 2002. Liabilities that may be affected by a plan of reorganization
are recorded at the expected amount of the allowed claims, even if they may be settled for lesser amounts. Substantially all of AWIs prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to
compromise. Obligations of Armstrong subsidiaries not covered by the Filing remain classified on the condensed consolidated balance sheet based upon maturity date. AWIs estimated liability for asbestos-related personal injury claims is also
recorded in liabilities subject to compromise. See Note 11 for further discussion of AWIs asbestos liability.



Additional prepetition claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the
allowance of contingent or disputed claims.



SOP 90-7 also requires separate
reporting of all revenues, expenses, realized gains and losses, and provision for losses related to the Filing as Chapter 11 reorganization costs, net. Accordingly, AWI recorded the following Chapter 11 reorganization activities during the first
nine months of 2003 and 2002:



|(amounts in millions)                             |  | 2003 |      |   | 2002 |  
|------------------------------------------------- |  | ---- | ---- | - | ---- | -
|Professional fees                                 |  | $    | 19.0 |   |      | $
|Interest income, post petition                    |  |      | (2.4 | ) |      |  
|Reductions to prepetition liabilities             |  |      | (0.5 | ) |      |  
|Other expense directly related to bankruptcy, net |  |      | 0.1  |   |      |  
|                                                  |  |      |      |   |      |  
|Total Chapter 11 reorganization costs, net        |  | $    | 16.2 |   |      | $
|                                                  |  |      |      |   |      |  



Professional fees represent legal and
financial advisory fees and expenses directly related to the Filing.



Interest
income is earned from short-term investments of cash subsequent to the Filing. Reductions to prepetition liabilities represent Court approved settlements of prepetition liabilities.



As a result of the Filing, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a
debtor-in-possession, AWI may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Although a POR and Disclosure Statement have been filed with the
Court, implementation of the POR is subject to



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confirmation of the POR in accordance with the provisions of the Bankruptcy Code. AWI is unable to predict when and if the POR will be confirmed. Therefore,
the timing and terms of a resolution of the Chapter 11 Case remain uncertain. Further, a confirmed plan of reorganization could materially change the amounts and classifications reported in the consolidated financial statements.



NOTE 4. SEGMENT RESULTS



(amounts in millions)



|                                           |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|------------------------------------------ |  | -------------------------------- | ----- | - | ------------------------------- | -
|Net sales to external customers            |  | 2003                             |       |   | 2002                            |  
|Resilient Flooring                         |  | $                                | 315.6 |   |                                 | $
|Wood Flooring                              |  |                                  | 183.7 |   |                                 |  
|Textiles and Sports Flooring               |  |                                  | 73.3  |   |                                 |  
|Building Products                          |  |                                  | 227.9 |   |                                 |  
|Cabinets                                   |  |                                  | 50.9  |   |                                 |  
|                                           |  |                                  |       |   |                                 |  
|Total sales to external customers          |  | $                                | 851.4 |   |                                 | $
|                                           |  |                                  |       |   |                                 |  
|                                           |  |                                 
|                                           |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|Segment operating income (loss)            |  | 2003                             |       |   | 2002                            |  
|Resilient Flooring                         |  | $                                | 20.8  |   |                                 | $
|Wood Flooring                              |  |                                  | (9.9  | ) |                                 |  
|Textiles and Sports Flooring               |  |                                  | 0.2   |   |                                 |  
|Building Products                          |  |                                  | 32.4  |   |                                 |  
|Cabinets                                   |  |                                  | (3.2  | ) |                                 |  
|All Other                                  |  |                                  | 0.5   |   |                                 |  
|                                           |  |                                  |       |   |                                 |  
|Total segment operating income             |  |                                  | 40.8  |   |                                 |  
|Unallocated Corporate (expense)            |  |                                  | (23.0 | ) |                                 |  
|                                           |  |                                  |       |   |                                 |  
|Total consolidated operating Income (loss) |  | $                                | 17.8  |   |                                 | $
|                                           |  |                                  |       |   |                                 |  



|Segment assets                  |  | September 30, 2003 |         | December 31, 2002
|------------------------------- |  | ------------------ | ------- | -----------------
|Resilient Flooring              |  | $                  | 917.1   |                  
|Wood Flooring                   |  |                    | 614.5   |                  
|Textiles and Sports Flooring    |  |                    | 212.6   |                  
|Building Products               |  |                    | 551.4   |                  
|Cabinets                        |  |                    | 110.3   |                  
|All Other                       |  |                    | 20.0    |                  
|                                |  |                    |         |                  
|Total segment assets            |  |                    | 2,425.9 |                  
|Assets not assigned to segments |  |                    | 2,118.5 |                  
|                                |  |                    |         |                  
|Total consolidated assets       |  | $                  | 4,544.4 |                  
|                                |  |                    |         |                  



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NOTE 5. LIABILITIES SUBJECT TO COMPROMISE



As a result of AWIs Chapter 11 filing (see Note 3), pursuant to SOP 90-7, AWI is
required to segregate prepetition liabilities that are subject to compromise and report them separately on the balance sheet. Liabilities that may be affected by a plan of reorganization are recorded at the amount of the expected allowed claims,
even if they may be settled for lesser amounts. Substantially all of AWIs prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of AHI subsidiaries not covered by
the Filing remain classified on the consolidated balance sheet based upon maturity date. AWIs asbestos liability is also recorded in liabilities subject to compromise. See Note 3 for further discussion on how the Chapter 11 process may address
AWIs liabilities subject to compromise and Note 11 for further discussion of AWIs asbestos liability.



Liabilities subject to compromise at September 30, 2003 and December 31, 2002 are as follows:



|(amounts in millions)                           |  | September 30, 2003 |         | December 31, 2002
|----------------------------------------------- |  | ------------------ | ------- | -----------------
|Debt (at face value)                            |  | $                  | 1,400.7 |                  
|Asbestos-related liability                      |  |                    | 3,190.6 |                  
|Prepetition trade payables                      |  |                    | 58.7    |                  
|Prepetition other payables and accrued interest |  |                    | 60.6    |                  
|ESOP loan guarantee                             |  |                    | 157.7   |                  
|                                                |  |                    |         |                  
|Total liabilities subject to compromise         |  | $                  | 4,868.3 |                  
|                                                |  |                    |         |                  



Additional prepetition claims
(liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.



NOTE 6. INVENTORIES



(amounts in millions)



|                             |  | September 30, 2003 |       |   | December 31, 2002 |  
|---------------------------- |  | ------------------ | ----- | - | ----------------- | -
|Finished goods               |  | $                  | 328.5 |   |                   | $
|Goods in process             |  |                    | 51.8  |   |                   |  
|Raw materials and supplies   |  |                    | 158.4 |   |                   |  
|Less LIFO and other reserves |  |                    | (77.6 | ) |                   |  
|                             |  |                    |       |   |                   |  
|Total inventories, net       |  | $                  | 461.1 |   |                   | $
|                             |  |                    |       |   |                   |  



NOTE 7. GOODWILL AND INTANGIBLE ASSETS



The following table
represents the changes in goodwill since December 31, 2002.



(amounts in
millions)



|Goodwill by segment         |  | January 1, 2003 |       | Adjustments, net(1) |   | Impairments |  | September 30, 2003
|--------------------------- |  | --------------- | ----- | ------------------- | - | ----------- |  | ------------------
|Resilient Flooring          |  | $               | 89.3  |                     | $ | 8.7         |  | $                 
|Wood Flooring               |  |                 | 113.8 |                     |   |            |  |                   
|Building Products           |  |                 | 11.9  |                     |   | 1.0         |  |                   
|Cabinets                    |  |                 | 12.6  |                     |   |            |  |                   
|                            |  |                 |       |                     |   |             |  |                   
|Total consolidated goodwill |  | $               | 227.6 |                     | $ | 9.7         |  | $                 
|                            |  |                 |       |                     |   |             |  |                   

---

|(1) | Effects of foreign exchange
|--- | ---------------------------



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The following table details amounts related to AHIs intangible assets as of September 30, 2003 and December 31,
2002.



|                              |  | September 30, 2003    |       | December 31, 2002       
|----------------------------- |  | --------------------- | ----- | ------------------------
|(amounts in millions)         |  | Gross Carrying Amount |       | Accumulated Amortization
|Amortized intangible assets   |  |                       |       |                         
|Computer software             |  | $                     | 101.3 |                         
|Land use rights and other     |  |                       | 4.4   |                         
|                              |  |                       |       |                         
|Total                         |  | $                     | 105.7 |                         
|                              |  |                       |       |                         
|Unamortized intangible assets |  |                       |       |                         
|Trademarks and brand names    |  | $                     | 29.2  |                         
|                              |  |                       |       |                         
|Total intangible assets       |  | $                     | 134.9 |                         
|                              |  |                       |       |                         



|Aggregate Amortization Expense               |  |   |     
|-------------------------------------------- |  | - | ----
|For the nine months ended September 30, 2003 |  | $ | 12.2
|For the nine months ended September 30, 2002 |  | $ | 10.4



NOTE 8. RESTRUCTURING AND OTHER ACTIONS



In July 2003, AHI
announced its plans to close the Wood Flooring manufacturing location in Port Gibson, Mississippi, effective September 2003, due to excess production capacity. The production has been transferred to another Wood Flooring location, resulting in a net
reduction of approximately 145 positions. Charges of $15.6 million, primarily related to accelerated depreciation, were recorded in the third quarter of 2003 as a component of cost of sales.



A $3.7 million restructuring charge was recorded in the third quarter of 2003. The charge
related primarily to severance benefits for approximately 72 employees in a Textiles and Sports Flooring plant in the Netherlands, as part of the continuing 2002 restructuring plan to consolidate certain functions in the European flooring business.
Separately, $0.8 million of the remaining reserve related to a noncancelable operating lease in the U.K. was reversed in the Unallocated Corporate segment as a result of reaching agreement with outside parties on future rent increases and disputed
rent payments by a sublessee. $0.2 million of the remaining accruals from the second quarter 2003 and second quarter 2002 charges in the Resilient Flooring segment was also reversed, comprising certain severance accruals that were no longer
necessary.



A $1.3 million restructuring charge was recorded in the second
quarter of 2003. The charge related primarily to severance benefits for approximately 11 employees in the Textiles and Sports Flooring ($0.7 million) and Resilient Flooring ($0.6 million) segments, as part of the continuing restructuring plan to
consolidate certain functions in the European flooring business. In addition, $0.4 million of the remaining accrual from the second quarter 2002 charge in the Resilient Flooring segment was reversed, comprising certain severance accruals that were
no longer necessary.



A $3.2 million restructuring charge was recorded in the
first quarter of 2003. The charge related to severance benefits for approximately 52 employees in the Textiles and Sports Flooring ($2.3 million) and Resilient Flooring ($0.9 million) segments, as part of the restructuring plan to consolidate
certain functions in the European flooring business.



In the third quarter of
2002, $0.6 million of the remaining accrual related to the first quarter 2002 and fourth quarter 2001 charges in the Textiles and Sports Flooring segment was reversed, comprising certain severance accruals that were no longer necessary.



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A $2.2 million restructuring charge was recorded in the second quarter of 2002. The charge primarily related to severance
benefits for approximately 120 employees in the European Resilient Flooring business due to a slow European economy and a consolidation of worldwide research and development activities. Of the $2.2 million, $0.4 million represented a non-cash charge
for enhanced retirement benefits, which is accounted for as an increase to pension benefit liabilities.



A $0.5 million restructuring charge was recorded in the first quarter of 2002. The charge related to severance benefits for 11 employees in the Textiles and Sports Flooring segment to reflect staffing needs for
current business conditions and continued efforts initiated in the fourth quarter of 2001.



The following table summarizes activity in the reorganization and restructuring accruals for the first nine months of 2003 and 2002. The net amount of charges and reversals in the table does not agree to the income
statement due to non-cash charges for enhanced retirement benefits that did not affect the restructuring accrual accounts.



|(amounts in millions) |  | Beginning Balance |     | Cash Payments |      |   | Charges |     | Reversals |      |   | Other |     | Ending Balance
|--------------------- |  | ----------------- | --- | ------------- | ---- | - | ------- | --- | --------- | ---- | - | ----- | --- | --------------
|2003                  |  | $                 | 9.1 |               | (3.4 | ) |         | 8.2 |           | (1.4 | ) |       | 0.6 |               
|2002                  |  |                   | 8.9 |               | (1.2 | ) |         | 2.3 |           | (0.6 | ) |       | 0.3 |               



The amount in other for
2003 and 2002 is primarily related to foreign currency translation.



Substantially all of the remaining balance of the restructuring accrual as of September 30, 2003 relates to a noncancelable-operating lease, which extends through 2017, and severance for terminated employees with extended payouts, the
majority of which will be paid by the second quarter of 2004.



NOTE 9. PRODUCT WARRANTIES



AHI
provides direct customer and end-user warranties for its products. These warranties cover manufacturing defects that would prevent the product from performing in line with its intended and marketed use. Generally, the terms of these warranties range
up to 25 years and provide for the repair or replacement of the defective product. AHI collects and analyzes warranty claims data with a focus on the historical amount of claims, the products involved, the amount of time between the warranty claims
and their respective sales and the amount of current sales. The following table illustrates the activity for product warranties for the first nine months of 2003 and 2002:



|(amounts in millions)                   |  | 2003 |       |   | 2002 |  
|--------------------------------------- |  | ---- | ----- | - | ---- | -
|Balance at January 1                    |  | $    | 22.7  |   |      | $
|Reductions for payments                 |  |      | (29.5 | ) |      |  
|Current year warranty accruals          |  |      | 31.0  |   |      |  
|Preexisting warranty accrual changes    |  |      | (0.3  | ) |      |  
|Effects of foreign exchange translation |  |      | 0.9   |   |      |  
|                                        |  |      |       |   |      |  
|Balance at September 30                 |  | $    | 24.8  |   |      | $
|                                        |  |      |       |   |      |  



NOTE 10. SUPPLEMENTAL CASH FLOW
INFORMATION



|                       |  | Nine Months Ended September 30,
|---------------------- |  | -------------------------------
|(amounts in millions)  |  | 2003                           
|Interest paid          |  | $                              
|Income taxes paid, net |  | $                              



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NOTE 11. LITIGATION AND RELATED MATTERS



ASBESTOS-RELATED LITIGATION



The following is a summary update of asbestos-related litigation; see Item 3 of AHIs
2002 Form 10-K filing for additional information.



AWI, the major operating
subsidiary of AHI, is a defendant in personal injury cases and property damage cases related to asbestos containing products. On December 6, 2000, AWI filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S.
Bankruptcy Code to use the court supervised reorganization process to achieve a resolution of the AWI asbestos liability.



AHI, and Armstrongs other subsidiaries, including Triangle Pacific Corp. (now Armstrong Wood Products Inc.), WAVE (Armstrongs ceiling grid systems joint
venture with Worthington Industries), Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating subsidiaries were not a part of the Filing. Asbestos-related claims against any of these non-debtor entities are not addressed in the Chapter
11 proceedings unless they are personal injury derivative liabilities of AWI.



Asbestos-Related Personal Injury Claims



Prior to filing for relief under the Bankruptcy Code, AWI was a member of the Center for Claims Resolution (the Center) which handled the defense and settlement of asbestos-related personal injury claims on behalf of its
members. The Center pursued broad-based settlements of asbestos-related personal injury claims under the Strategic Settlement Program (SSP) and had reached agreements with law firms that covered approximately 130,000 claims that named
AWI as a defendant.



Due to the Filing, holders of asbestos-related personal
injury claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments to the Center with respect to asbestos-related personal injury claims, including payments
pursuant to the outstanding SSP agreements. AWIs obligations with respect to payments called for under these settlements will be determined in its Chapter 11 Case.



A creditors committee representing the interests of asbestos personal injury claimants and an individual representing the interests of
future personal injury claimants have been appointed in the Chapter 11 Case. AWIs present and future asbestos liability will be addressed in its Chapter 11 Case rather than through the Center and a multitude of lawsuits in different
jurisdictions throughout the U.S. It is anticipated that all of AWIs current and future asbestos-related personal injury claims will be resolved in the Chapter 11 Case.



Asbestos-Related Personal Injury Liability



In March 2003, AWI filed an amended Plan of Reorganization and disclosure statement and in
May 2003, AWI filed a further amended Plan of Reorganization (POR). The POR represents the product of negotiations with and is supported by the Asbestos Personal Injury Claimants Committee, the Unsecured Creditors Committee
and the Future Claimants Representative. Based upon the events that occurred through early March 2003, management concluded that it could reasonably estimate its probable liability for AWIs current and future asbestos-related personal
injury claims. Accordingly, in the fourth quarter of 2002, AWI recorded a $2.5 billion charge to increase the liability. The recorded asbestos-related liability for personal injury claims of approximately $3.2 billion at September 30, 2003 and
December 31, 2002, which was treated as subject to compromise, represents the estimated amount of liability that is implied based upon the negotiated resolution reflected in the POR, the total consideration expected to be paid to the Asbestos PI
Trust pursuant to the POR and a recovery value percentage for the allowed claims of the Asbestos PI Trust that is equal to the estimated recovery value percentage for the allowed non-asbestos unsecured claims. Pursuant to the POR, all AWI current
and future asbestos-related personal injury claims against AWI and other protected parties, as defined by the POR, will be channeled to the Asbestos PI Trust for resolution and, upon emergence from Chapter 11, reorganized AWI will not have any
responsibility for the claims or participate in their resolution. Claims against non-debtor companies, including Armstrong domestic and foreign subsidiaries, will not be channeled to the Asbestos PI Trust unless they are derivative liabilities of
AWI. For a complete description of the protection from asbestos claims, please read the POR.



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It is anticipated that the Court will hold a hearing to consider confirmation of the POR on November 17 and 18, 2003.
However, AWI is unable to predict when and if this POR will be confirmed. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded liability are
possible and could be material to AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and make changes to the recorded
liability if and when it is appropriate.



The $2.5 billion, fourth quarter
2002, charge to increase the asbestos-related personal injury liability was before recognition of gains from the settlement of liabilities subject to compromise, which will arise at a later date as a consequence of the Chapter 11 process.



Collateral Requirements



During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos-related personal injury claims asserted against AWI. On October 27, 2000, the insurance company that underwrote the surety bond informed AWI and the Center of its intention not to renew
the surety bond effective February 28, 2001. On February 6, 2001, the Center advised the surety of the Centers demand for payment of the face value of the bond. The surety filed a motion with the Court seeking to restrain the Center from
drawing on the bond. The motion was not granted. On March 28, 2001, the surety filed an amended complaint in the Court seeking similar relief. In addition, on April 27, 2001, AWI filed a complaint and a motion with the Court seeking an order, among
other things, enjoining the Center from drawing on the bond or, in the event the Center is permitted to draw on the bond, requiring that the proceeds of any such draw be deposited into a Court-approved account subject to further order of the Court.
Judge Alfred M. Wolin of the Federal District Court for the District of New Jersey (the District Court), who is also presiding over AWIs Chapter 11 Case, indicated he would determine these matters. In the spring of 2002, the surety
and the Center agreed to voluntarily dismiss the suretys complaint against the Center in light of AWIs filing of its complaint. The parties filed cross-motions for summary judgment with respect to the issue of whether the Center is
entitled to draw on the surety bond. On March 28, 2003, the District Court granted in part the Centers motion for summary judgment, and rejected certain defenses to the Centers attempt to draw on the surety bond. The District Court
further ruled that the surety bond did not cover settlements with asbestos claimants that were not documented as of the Filing. On April 7, 2003, the Center filed a motion to vacate that portion of the District Courts opinion that ruled that
the surety bond does not cover any settlement not documented as of the Filing. On July 9, 2003, the District Court granted AWIs motion for summary judgment in favor of AWI, dismissing the Centers claims against AWI on the basis that the
surety bond is unenforceable. During October 2003, AWI, the Asbestos Personal Injury Claimants Committee and the Unsecured Creditors Committee reached an agreement to settle claims from the Center and the surety bond insurance company.
As a result, AWI recorded $8.0 million in the third quarter of 2003 as a charge for asbestos liability, net.



Asbestos-Related Property Damage Litigation



Over the years, AWI was one of many defendants in asbestos-related property damage claims that were filed by public and private building
owners, with six claims pending as of June 30, 2001. The claims that were resolved prior to the Filing resulted in aggregate indemnity obligations of less than $10 million, which were entirely covered by insurance



The commencement of any new asbestos property damage actions are stayed due to the Filing. A
separate creditors committee representing the interests of property damage asbestos claimants was appointed in the Chapter 11 Case. Approximately 600 proofs of claim were filed with the Court in response to the March 1, 2002 bar date for
asbestos-related property damage claims. See Note 3 for further discussion. As part of determining whether AWI asbestos containing resilient floor covering products give rise to property damage liability, the Court conducted an initial hearing on
September 26  27, 2002 to decide the type of scientific testing allowable under the Federal Rules of Evidence to prove or



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disprove whether such products cause building contamination. On October 22, 2002, the Court granted AWIs requested relief and ruled that the
methodology offered by the Asbestos Property Damage Committee in support of its claims is not a scientifically valid method of quantifying the level of asbestos contamination in a building. On November 1, 2002, the Court directed that all property
damage claimants provide, in support of their claims, substantiation that Armstrong flooring products were used in the claimants buildings. The Courts deadline for submission of such product identification documentation was February 10,
2003. During the first six months of 2003, AWI settled all of the approximately 460 remaining property damage claims that alleged damages of $800 million, for approximately $9 million. Payments to claimants were made during the third quarter of 2003
and were funded by insurance. Based on the settlement of all remaining asbestos-related property damage claims, the Asbestos Property Damage Committee has been disbanded.



Insurance Recovery Proceedings



A substantial portion of AWIs primary and excess remaining insurance asset is nonproducts (general liability) insurance for personal
injury claims, including among others, those that involve alleged exposure during AWIs installation of asbestos insulation materials. AWI has entered into settlements with a number of the carriers resolving its coverage issues. However, an
alternative dispute resolution (ADR) procedure was commenced against certain carriers to determine the percentage of resolved and unresolved claims that are nonproducts claims, to establish the entitlement to such coverage and to
determine whether and how much reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is substantial and includes defense costs in addition to limits.



During 1999, AWI received preliminary decisions in the initial phases of the trial proceeding
of the ADR, which were generally favorable to AWI on a number of issues related to insurance coverage. However, during the first quarter of 2001, a new trial judge was selected for the ADR. The new trial judge conducted hearings in 2001 and
determined not to rehear matters decided by the previous judge. In the first quarter of 2002, the new trial judge concluded the ADR trial proceeding with findings in favor of AWI on substantially all key issues. Liberty Mutual, the only insurer that
is still a party to the ADR, appealed that final judgment. Appellate argument was held on March 11, 2003. On July 30, 2003, the appellate arbitrators ruled that AWIs claims against certain Liberty Mutual policies were barred by the statute of
limitations. The ruling did not address the merits of any of the other issues Liberty Mutual raised in its appeal. Based on that unfavorable ruling, AWI concluded that $73 million of previously recorded insurance assets were no longer probable of
recovery. AWI was also ordered to reimburse Liberty Mutual for certain costs and administration fees that Liberty Mutual incurred during the ADR. The amount of these costs and fees are unknown and AWI is currently unable to estimate the amount.
Based upon an AWI request, the appellate panel has scheduled a rehearing for November 21, 2003.



In July 2002, AWI filed a lawsuit against Liberty Mutual in the Federal District Court for the Eastern District of Pennsylvania seeking, among other things, a declaratory judgment with respect to certain policy issues
not subject to binding ADR. The Federal District Court has not yet set a schedule to hear this matter.



One of the insurance carriers, Reliance Insurance Company, was placed under an order of liquidation by the Pennsylvania Insurance Department during October 2001 due to financial difficulties. The order of liquidation
prohibits Reliance from making any claim payments under the insurance policies until the liquidation occurs. AWI filed a proof of claim against Reliance during July 2003. It is uncertain when AWI will receive proceeds from Reliance under these
insurance policies.



Another insurer, Century Indemnity Company, who previously
settled its coverage issues with AWI, has made some of its required payments under the settlement to a trust of which AWI is a beneficiary. During January 2002, this insurer filed an adversary action in AWIs Chapter 11 Case. Among other
things, the action requests the Court to (1) declare that the settlement agreement is an executory contract and to compel assumption or rejection of the agreement; (2) declare that the insurer need not make its present and future scheduled payments
unless AWI assumes the agreement; (3) declare that the insurer is entitled to indemnification from AWI against any liabilities that the insurer may incur in certain unrelated litigation in which the insurer is involved; and (4) enjoin the
disposition of funds previously paid by the insurer to the trust pending an adjudication of the insurers rights. On October 7, 2003, the Court ruled that Century must pay the past due amounts plus interest. Century has appealed the
Courts ruling.



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On June 13, 2003, the New Hampshire Insurance Department placed The Home Insurance Company (Home) under an
order of liquidation. Less than $10 million of AWIs recorded insurance asset is based on policies with Home, which management believes is still probable of recovery. AWI intends to file a proof of claim against Home by the June 2004 deadline.
It is uncertain when AWI will receive proceeds from Home under these insurance policies.



Insurance Asset



An insurance asset in respect of asbestos claims in the amount of $111.1 million is recorded as of September 30, 2003 compared to $198.1 million recorded at December 31,
2002. During the second quarter of 2003, AWI reduced its previously recorded insurance asset for asbestos-related personal injury claims by $73 million reflecting managements current assessment of probable insurance recoveries in light of the
ADR appellate panel decision. The $73 million was recorded as a charge for asbestos liability, net, in the accompanying condensed consolidated statement of earnings. Also during the second quarter of 2003, the insurance asset was lowered by $14
million for asbestos-related personal injury insurance recoveries. Further, the insurance asset was increased by $9 million to reflect agreements reached during the first half of 2003 for asbestos property damage claims. During the third quarter of
2003, AWI received $9.0 million of insurance proceeds related to the asbestos property damage claims.



Approximately $22.0 million of the total $111.1 million recorded insurance asset at September 30, 2003 represents partial settlement for previous claims that will be paid in a fixed and determinable flow and is
reported at its net present value discounted at 6.50%. The total amount recorded reflects AWIs belief that insurance proceeds will be recovered in this amount, based upon AWIs success in insurance recoveries, settlement agreements that
provide such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. Such insurance is either available through settlement or probable of recovery through negotiation or litigation. Depending on further progress
of the ADR, activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, the final determination of coverage shared with ACandS (the former AWI insulation contracting subsidiary that was sold in
August 1969 and which filed for relief under Chapter 11 of the Bankruptcy Code in September 2002) and the financial condition of the insurers, AWI may revise its estimate of probable insurance recoveries. Approximately $79 million of the $111.1
million asset is determined from agreed coverage in place. Of the $111.1 million, $16.0 million has been recorded as a current asset as of September 30, 2003 reflecting managements estimate of the minimum insurance payments to be received in
the next 12 months. As of October 2003, approximately $8.0 million of the $16.0 million current asset is past due. AWI believes collection of the full amount is still probable and therefore has not established a reserve against these receivables.



AWI believes that the process of pursuing disputed insurance coverage may
result in additional settlement amounts than already recorded. However, many uncertainties remain in this process, therefore, AWI did not increase the estimated insurance recovery asset in the fourth quarter of 2002, when it revised its recorded
asbestos liability for personal injury claims by $2.5 billion.



Cash Flow Impact



As a result of the
Chapter 11 Filing, AWI did not make any payments for asbestos-related personal injury claims in the first nine months of 2003 or 2002. During the first nine months of 2003 and 2002, AWI received asbestos-related personal injury insurance recoveries
of $14.0 million and $16.0 million, respectively. During the third quarter of 2003, AWI paid $9.0 million for asbestos-related property damage claims and received $9.0 million of insurance proceeds related to these claims. During the pendency of the
Chapter 11 Case, AWI does not expect to make any further cash payments for asbestos-related claims, but AWI expects to continue to receive insurance proceeds under the terms of various settlement agreements. Management estimates that the timing of
future cash recoveries of the recorded asset may extend beyond 10 years.



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Potential Legislation



The media has been reporting that progress is being made among some industry groups,
insurers, labor unions and members of the United States Congress, on agreeing to comprehensive legislation to resolve asbestos litigation issues through a proposed national privately funded trust. While the United States Senate Judiciary Committee
reached an agreement on a proposed bill in July 2003, negotiations continue on a final bill to submit for consideration by the full Senate. There is uncertainty as to whether this or any other proposal will become law, and what impact, if any, there
might be on AWIs asbestos liability and/or AWIs Chapter 11 Case. Prior efforts to enact asbestos legislation have not been successful.



Conclusion



Many uncertainties continue to exist about the matters impacting AWIs asbestos-related liability and insurance asset. These uncertainties include the impact of the
Filing and the Chapter 11 process, the number of future claims to be filed, the ultimate value of the asbestos liability, the impact of any potential legislation, the impact of the ADR proceedings on the insurance asset and the financial condition
of AWIs insurance carriers. During 2003, AWI has not revised its previously recorded liability for asbestos-related personal injury claims. However, during the second quarter of 2003, AWI reduced its previously recorded insurance asset for
asbestos-related personal injury claims by $73 million reflecting managements current assessment of probable insurance recoveries based on the unfavorable ruling by the ADR appellate panel.



Additionally, although a POR and Disclosure Statement have been filed with the Court and
submitted for voting by creditors, implementation of the POR is subject to the creditors vote and confirmation of the POR in accordance with the provisions of the Bankruptcy Code. AWI is unable to predict when and if the POR will be confirmed.
Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded liability and insurance asset are possible and could be material to AWIs financial
position and the results of its operations. Management will continue to review the recorded liability and insurance asset in light of future developments in the Chapter 11 Case and make changes to the recorded amounts if and when it is appropriate.



NON-CHAPTER 11 ASBESTOS-RELATED
LITIGATION



Historically, Armstrong non-debtor companies, including
Armstrong domestic and foreign subsidiaries, have been involved in defending and resolving some third party and other asbestos-related claims. Currently, an Armstrong domestic non-debtor subsidiary is a defendant in two third party asbestos-related
litigation matters pending in California state court. It is asserted that the plaintiffs were exposed to asbestos for many years in various occupations, including while aboard various ships in the 1940s , and as a result contracted various
asbestos-related diseases. It is alleged that the Armstrong subsidiary is a successor in interest to a company that, at certain times, allegedly owned some of these vessels. The cases have multiple defendants. Another case that was
scheduled for trial in November 2003 has been dismissed. Armstrong denies liability and is aggressively defending the matters. Armstrong has not recorded any liability for these matters. Management does not expect that any sum that may have to be
paid in connection with these two matters will have a material adverse effect on its consolidated results of operations or liquidity.



ENVIRONMENTAL LIABILITIES



Most of Armstrongs manufacturing and certain of Armstrongs research facilities are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment. Armstrong has made, and intends to continue to make, necessary expenditures for compliance with applicable environmental requirements at its operating facilities. Armstrong
anticipates that annual expenditures for those purposes will not change materially from recent experience. However, applicable environmental laws continue to change. As a result of continuous changes in regulatory requirements, Armstrong cannot
predict with certainty future capital expenditures associated with compliance with environmental requirements.



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Armstrong is involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act
(Superfund), and similar state laws at approximately 24 sites. In most cases, Armstrong is one of many potentially responsible parties (PRPs) which have potential liability for the required investigation and remediation of
each site and which, in some cases, have agreed to jointly fund that required investigation and remediation. With regard to some sites, however, Armstrong disputes the liability, the proposed remedy or the proposed cost allocation among the PRPs.
Armstrong may have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.



Armstrong has also been remediating environmental contamination resulting from past industrial activity at certain of its former plant sites. Estimates of
Armstrongs future environmental liability at the Superfund sites and current or former plant sites are based on evaluations of currently available facts regarding each individual site and consider factors such as Armstrongs activities in
conjunction with the site, existing technology, presently enacted laws and regulations and prior company experience in remediating contaminated sites. Although current law imposes joint and several liability on all parties at Superfund sites,
Armstrongs contribution to the remediation of these sites is expected to be limited by the number of other companies also identified as potentially liable for site remediation. As a result, Armstrongs estimated liability reflects only
Armstrongs expected share. In determining the probability of contribution, Armstrong considers the solvency of the parties, whether liability is being disputed, the terms of any existing agreements and experience with similar matters. The
Chapter 11 Case also may affect the ultimate amount of such contributions.



AWIs payments and remediation work on such sites for which AWI is the potentially responsible party is under review in light of the Chapter 11 Filing. The bar date for claims from several environmental agencies expired during the
third quarter of 2003. AWI received an unliquidated proof of claim from the United States Environmental Protection Agency (EPA).



In July 2003, the EPA notified Armstrong, as a PRP at a particular Superfund site, of the EPAs estimate of the sites future cleanup costs, with its assessment
of AWIs share of the costs being a range of $17.8 million to $26.2 million. AWI is currently reviewing this matter but disputes the assessment.



Management is currently in discussions with the EPA to resolve the unliquidated proof of claim against AWI. Upon further analysis of the sites being discussed, management
estimated that AWIs probable share of the sites future cleanup costs is $3.1 million. AWI recorded a charge of $2.4 million within selling, general and administrative expense in the third quarter of 2003 to increase its liability to this
new estimate.



AWI is subject to a unilateral order by the Oregon Department of
Environmental Quality (DEQ) to conduct a remedial investigation and feasibility study and any necessary remedial design and action at its St. Helens, Oregon facility, as well as the adjacent Scappoose Bay. AWI has denied liability for
the Scappoose Bay, but has cooperated with the DEQ regarding its owned property. Other potentially responsible parties who are not yet subject to orders by the DEQ include former site owners Owens Corning (OC) and Kaiser Gypsum Company,
Inc. (Kaiser). AWI has entered into an agreement with Kaiser for the sharing of costs and responsibilities with respect to the remedial investigation, feasibility study and remedy selection at the site. OC has entered into a settlement
with the DEQ. Pursuant to the settlement, OC will make a lump sum payment to the DEQ in exchange for contribution protection (including protection against common law and statutory contribution claims by AWI against OC) and a covenant not to sue. AWI
has negotiated with the DEQ how these funds will be made available for the investigation and remedial action for the site. AWI has recorded an environmental liability with respect to the St. Helens remedial investigations and feasibility study at
its facility, but not for Scappoose Bay because AWI continues to dispute responsibility for any contamination in Scappoose Bay.



Liabilities of $23.6 million at September 30, 2003 and $21.2 million at December 31, 2002 were for potential environmental liabilities that Armstrong considers probable
and for which a reasonable estimate of the probable liability could be made. Where existing data is sufficient to estimate the liability, that estimate has been used; where only a range of probable liability is available and no amount within that
range is more likely than any other, the lower end of the range has been used. As assessments and



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##### Table of Contents

remediation activities progress at each site, these liabilities are reviewed to reflect additional information as it becomes available. Due to the Chapter 11
Filing, $12.8 million of the September 30, 2003 and $11.4 million of the December 31, 2002 environmental liabilities are classified as prepetition liabilities subject to compromise. As a general rule, the Chapter 11 process does not preserve company
assets for such prepetition liabilities.



The estimated liabilities above do
not take into account any claims for recoveries from insurance or third parties. Such recoveries, where probable, have been recorded as an asset in the consolidated financial statements and are either available through settlement or anticipated to
be recovered through negotiation or litigation. The amount of the recorded asset for estimated recoveries was $2.5 million and $3.3 million at September 30, 2003 and December 31, 2002, respectively.



Actual costs to be incurred at identified sites may vary from the estimates, given the
inherent uncertainties in evaluating environmental liabilities. Subject to the imprecision in estimating environmental remediation costs, Armstrong believes that any sum it may have to pay in connection with environmental matters in excess of the
amounts noted above would not have a material adverse effect on its financial condition, or liquidity, although the recording of future costs may be material to earnings in such future period.



PATENT INFRINGEMENT CLAIMS



Armstrong is a defendant in three related lawsuits claiming patent infringement related to
some of Armstrongs laminate products. The plaintiffs have claimed unspecified monetary damages. Armstrong is being defended and indemnified by its supplier for all costs and potential damages related to the litigation.



FORMER EMPLOYEES CLAIM



Former Armstrong employees that were separated from the company in two business divestitures
in 2000 brought two purported class actions against the Retirement Committee of AWI, certain current and former members of the Retirement Committee, the Retirement Savings and Stock Ownership Plan (RSSOP), AHI and the trustee bank of the RSSOP.
Plaintiffs alleged breach of Employee Retirement Income Security Act (ERISA) fiduciary duties and other violations of ERISA pertaining to losses in their RSSOP accounts, which were invested in Armstrong common stock.



An agreement was reached to settle this matter. Contributors to the settlement are AWI, its
insurer and the trustee bank of the RSSOP. The full amount of the settlement will be allocated among approximately 370 former employees. AWIs portion of the settlement is $1.0 million, which will be treated as convenience claims in the Chapter
11 Case. The settlement was approved by the Bankruptcy Court on March 31, 2003 and by the United States District Court (Eastern District of PA) on June 16, 2003. Based upon the Bankruptcy Courts approval of the settlement, AWI recorded a $1.0
million charge in the first quarter of 2003 as an other non-operating expense.



DEPARTMENT OF LABOR DISCUSSIONS



Subsequent to an audit by the United States Department of Labor (DOL), Armstrong was informed that the DOL was challenging the validity of the use of certain
contributions, in the approximate aggregate amount of $33.4 million, to fund debt payments made by the Armstrong Employee Stock Ownership Plan (ESOP), as provided for by that plan. Armstrong and the DOL reached a settlement to resolve
this matter with a funding to the ESOP of $1.5 million, which will be distributed to plan participants in accordance with terms of the agreement. Insurance and third parties will fund $0.9 million of the settlement. In the third quarter of 2003,
Armstrong recorded a liability of $1.5 million and a receivable of $0.9 million as a selling, general and administrative expense to represent Armstrongs $0.6 million funding of the settlement, which will be paid in the fourth quarter of 2003.



OTHER CLAIMS



Additionally, AHI, through AWI and AWIs subsidiaries, is involved in various other
claims and legal actions involving product liability, patent infringement, distributor termination, employment law issues and other actions arising in the ordinary course of business. While complete assurance cannot be given to the outcome of these
claims, AHI does not expect that any sum that may have to be paid in connection with these matters will have a materially adverse effect on its consolidated financial position or liquidity, however it could be material to the results of operations
in the particular period in which a matter is resolved.



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NOTE 12. SUBSEQUENT EVENT



In October 2003, AHI announced its plans to close a Wood Flooring manufacturing location in
Warren, Arkansas, effective December 2003, due to excess production capacity. Approximately 130 employees work at the plant. It is expected that charges of approximately $8 million will be recorded during the fourth quarter of 2003 to cover
accelerated depreciation and severance.



NOTE 13. DIFFERENCES BETWEEN ARMSTRONG HOLDINGS, INC. AND ARMSTRONG WORLD INDUSTRIES, INC.



The difference between the condensed consolidated financial statements is primarily due to stock activity and intercompany transactions.



NOTE 14. EARNINGS PER SHARE



The difference between the average number of basic and diluted common shares outstanding is due to contingently issuable shares. Earnings
per share components may not add due to rounding.



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Independent Accountants Review Report



The
Board of Directors and Shareholders

Armstrong Holdings, Inc.:



We have reviewed the accompanying condensed consolidated balance sheet of Armstrong Holdings, Inc., and subsidiaries (the Company) as of September 30, 2003,
and the related condensed consolidated statements of earnings for the three and nine-month periods ended September 30, 2003 and 2002, and the related condensed consolidated statements of cash flows and shareholders equity for the nine-month
periods ended September 30, 2003 and 2002. These condensed consolidated financial statements are the responsibility of the Companys management.



We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information
consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.



Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements
referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.



We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Armstrong
Holdings, Inc., and subsidiaries as of December 31, 2002, and the related consolidated statements of earnings, cash flows and shareholders equity for the year then ended (not presented herein); and in our report dated March 14, 2003 we
expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.



Our
report dated March 14, 2003, on the consolidated financial statements of Armstrong Holdings, Inc., and subsidiaries as of and for the year ended December 31, 2002, contains an explanatory paragraph that states that three of the Companys
domestic subsidiaries, including Armstrong World Industries, Inc., the Companys major operating subsidiary, filed separate voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court on December 6, 2000, and that the filing under Chapter 11 and the increased uncertainty regarding the Companys potential asbestos liability raise substantial doubt about the Companys ability to continue as a going concern. The
condensed consolidated balance sheet as of December 31, 2002, does not include any adjustments that might result from the outcome of these uncertainties.



/s/ KPMG LLP



Philadelphia, Pennsylvania

October 30, 2003



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Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Earnings

(amounts in millions)

Unaudited



|                                                                                                  |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | -
|                                                                                                  |  | 2003                             |       |   | 2002                            |  
|Net sales                                                                                         |  | $                                | 851.4 |   |                                 | $
|Cost of goods sold                                                                                |  |                                  | 677.9 |   |                                 |  
|                                                                                                  |  |                                  |       |   |                                 |  
|Gross profit                                                                                      |  |                                  | 173.5 |   |                                 |  
|                                                                                                  |  |                                  |       |  
|Selling, general and administrative expenses                                                      |  |                                  | 151.1 |   |                                 |  
|Charge for asbestos liability, net                                                                |  |                                  | 8.0   |   |                                 |  
|Restructuring and reorganization charges (reversals), net                                         |  |                                  | 2.7   |   |                                 |  
|Equity (earnings) from affiliates, net                                                            |  |                                  | (6.1  | ) |                                 |  
|                                                                                                  |  |                                  |       |   |                                 |  
|Operating income (loss)                                                                           |  |                                  | 17.8  |   |                                 |  
|                                                                                                  |  |                                  |       |  
|Interest expense (unrecorded contractual interest of $24.9, $24.9, $74.4 and $74.4, respectively) |  |                                  | 2.7   |   |                                 |  
|Other non-operating expense                                                                       |  |                                  | 4.5   |   |                                 |  
|Other non-operating (income)                                                                      |  |                                  | (1.0  | ) |                                 |  
|Chapter 11 reorganization costs, net                                                              |  |                                  | 6.3   |   |                                 |  
|                                                                                                  |  |                                  |       |   |                                 |  
|Earnings (loss) before income taxes and cumulative effect of a change in accounting principle     |  |                                  | 5.3   |   |                                 |  
|                                                                                                  |  |                                  |       |  
|Income tax expense                                                                                |  |                                  | 10.0  |   |                                 |  
|                                                                                                  |  |                                  |       |   |                                 |  
|Earnings (loss) before cumulative effect of a change in accounting principle                      |  |                                  | (4.7  | ) |                                 |  
|                                                                                                  |  |                                  |       |  
|Cumulative effect of a change in accounting principle, net of tax of $2.2                         |  |                                  |      |   |                                 |  
|                                                                                                  |  |                                  |       |   |                                 |  
|Net earnings (loss)                                                                               |  | $                                | (4.7  | ) |                                 | $
|                                                                                                  |  |                                  |       |   |                                 |  



See accompanying notes to condensed
consolidated financial statements beginning on page 34.



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Balance Sheets

(amounts in millions)



|                                                                                                                     |  | Unaudited September 30, 2003 |          |   | December 31, 2002 |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ----------------- | -
|Assets                                                                                                               |  |                              |          |   |                   |  
|Current Assets:                                                                                                      |  |                              |          |   |                   |  
|Cash and cash equivalents                                                                                            |  | $                            | 425.9    |   |                   | $
|Accounts and notes receivable, net                                                                                   |  |                              | 377.8    |   |                   |  
|Inventories, net                                                                                                     |  |                              | 461.1    |   |                   |  
|Deferred income taxes                                                                                                |  |                              | 17.3     |   |                   |  
|Other current assets                                                                                                 |  |                              | 84.9     |   |                   |  
|                                                                                                                     |  |                              |          |   |                   |  
|Total current assets                                                                                                 |  |                              | 1,367.0  |   |                   |  
|                                                                                                                     |  |                             
|Property, plant and equipment, less accumulated depreciation and amortization of $1,383.6 and $1,263.8,
respectively |  |                              | 1,257.7  |   |                   |  
|                                                                                                                     |  |                             
|Insurance receivable for asbestos-related liabilities, noncurrent                                                    |  |                              | 95.1     |   |                   |  
|Prepaid pension costs                                                                                                |  |                              | 447.0    |   |                   |  
|Investment in affiliates                                                                                             |  |                              | 49.7     |   |                   |  
|Goodwill, net                                                                                                        |  |                              | 237.3    |   |                   |  
|Other intangibles, net                                                                                               |  |                              | 81.0     |   |                   |  
|Deferred income taxes, noncurrent                                                                                    |  |                              | 901.3    |   |                   |  
|Other noncurrent assets                                                                                              |  |                              | 108.3    |   |                   |  
|                                                                                                                     |  |                              |          |   |                   |  
|Total assets                                                                                                         |  | $                            | 4,544.4  |   |                   | $
|                                                                                                                     |  |                              |          |   |                   |  
|Liabilities and Shareholders Equity                                                                                 |  |                              |          |   |                   |  
|Current liabilities:                                                                                                 |  |                              |          |   |                   |  
|Short-term debt                                                                                                      |  | $                            | 5.0      |   |                   | $
|Current installments of long-term debt                                                                               |  |                              | 8.4      |   |                   |  
|Accounts payable and accrued expenses                                                                                |  |                              | 348.9    |   |                   |  
|Short term amounts due to affiliates                                                                                 |  |                              | 10.0     |   |                   |  
|Income taxes                                                                                                         |  |                              | 57.3     |   |                   |  
|                                                                                                                     |  |                              |          |   |                   |  
|Total current liabilities                                                                                            |  |                              | 429.6    |   |                   |  
|                                                                                                                     |  |                             
|Liabilities subject to compromise                                                                                    |  |                              | 4,873.0  |   |                   |  
|                                                                                                                     |  |                             
|Long-term debt, less current installments                                                                            |  |                              | 41.6     |   |                   |  
|Postretirement and postemployment benefit liabilities                                                                |  |                              | 259.5    |   |                   |  
|Pension benefit liabilities                                                                                          |  |                              | 204.2    |   |                   |  
|Other long-term liabilities                                                                                          |  |                              | 82.2     |   |                   |  
|Deferred income taxes                                                                                                |  |                              | 17.8     |   |                   |  
|Minority interest in subsidiaries                                                                                    |  |                              | 9.6      |   |                   |  
|                                                                                                                     |  |                              |          |   |                   |  
|Total noncurrent liabilities                                                                                         |  |                              | 5,487.9  |   |                   |  
|                                                                                                                     |  |                             
|Shareholders equity (deficit):                                                                                      |  |                              |          |   |                   |  
|Common stock, $1 par value per share Authorized 200 million shares; issued 51,878,910 shares                         |  |                              | 51.9     |   |                   |  
|Capital in excess of par value                                                                                       |  |                              | 172.9    |   |                   |  
|Reduction for ESOP loan guarantee                                                                                    |  |                              | (142.2   | ) |                   |  
|Accumulated deficit                                                                                                  |  |                              | (940.0   | ) |                   |  
|Accumulated other comprehensive income (loss)                                                                        |  |                              | 12.8     |   |                   |  
|Less common stock in treasury, at cost 2003 and 2002  11,393,170 shares                                             |  |                              | (528.5   | ) |                   |  
|                                                                                                                     |  |                              |          |   |                   |  
|Total shareholders deficit                                                                                          |  |                              | (1,373.1 | ) |                   |  
|                                                                                                                     |  |                              |          |   |                   |  
|Total liabilities and shareholders equity                                                                           |  | $                            | 4,544.4  |   |                   | $
|                                                                                                                     |  |                              |          |   |                   |  



See accompanying notes to condensed
consolidated financial statements beginning on page 34.



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Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Shareholders Equity

(amounts in millions)

Unaudited



|                                               |  | 2003 |          |   | 2002 |  
|---------------------------------------------- |  | ---- | -------- | - | ---- | -
|Common stock, $1 par value:                    |  |      |          |   |      |  
|Balance at beginning of year and September 30  |  | $    | 51.9     |   |      |  
|                                               |  |      |          |   |      |  
|Capital in excess of par value:                |  |      |          |   |      |  
|Balance at beginning of year and September 30  |  | $    | 172.9    |   |      |  
|                                               |  |      |          |   |      |  
|Reduction for ESOP loan guarantee:             |  |      |          |   |      |  
|Balance at beginning of year and September 30  |  | $    | (142.2   | ) |      |  
|                                               |  |      |          |   |      |  
|Retained earnings (accumulated deficit):       |  |      |          |   |      |  
|Balance at beginning of year                   |  | $    | (902.9   | ) |      |  
|Net (loss) for nine months                     |  |      | (37.1    | ) |      | $
|                                               |  |      |          |   |      |  
|Balance at September 30                        |  | $    | (940.0   | ) |      |  
|                                               |  |      |          |   |      |  
|Accumulated other comprehensive income (loss): |  |      |          |   |      |  
|Balance at beginning of year                   |  | $    | (12.2    | ) |      |  
|Foreign currency translation adjustments       |  |      | 28.7     |   |      |  
|Derivative (loss) gain, net                    |  |      | (2.1     | ) |      |  
|Minimum pension liability adjustments          |  |      | (1.6     | ) |      |  
|                                               |  |      |          |   |      |  
|Total other comprehensive income               |  |      | 25.0     |   |      |  
|                                               |  |      |          |   |      |  
|Balance at September 30                        |  | $    | 12.8     |   |      |  
|                                               |  |      |          |   |      |  
|Comprehensive (loss)                           |  |      |          |   |      | $
|                                               |  |      |          |   |      |  
|Less treasury stock at cost:                   |  |      |          |   |      |  
|Balance at beginning of year and September 30  |  | $    | (528.5   | ) |      |  
|                                               |  |      |          |   |      |  
|Total shareholders equity (deficit)           |  | $    | (1,373.1 | ) |      |  
|                                               |  |      |          |   |      |  



See accompanying notes to condensed
consolidated financial statements beginning on page 34.



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Armstrong World Industries, Inc., and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in millions)

Unaudited



|                                                                                                |  | Nine Months Ended September 30, |      
|----------------------------------------------------------------------------------------------- |  | ------------------------------- | -----
|                                                                                                |  | 2003                            |      
|Cash flows from operating activities:                                                           |  |                                 |      
|Net (loss)                                                                                      |  | $                               | (37.1
|Adjustments to reconcile net (loss) to net cash provided by operating activities:               |  |                                 |      
|Cumulative effect of change in accounting principle, net                                        |  |                                 |     
|Depreciation and amortization                                                                   |  |                                 | 129.9
|Deferred income taxes                                                                           |  |                                 | (35.6
|Equity (earnings) from affiliates, net                                                          |  |                                 | (17.5
|Chapter 11 reorganization costs, net                                                            |  |                                 | 16.2 
|Chapter 11 reorganization costs payments                                                        |  |                                 | (19.6
|Restructuring and reorganization charges, net of reversals                                      |  |                                 | 6.8  
|Restructuring and reorganization payments                                                       |  |                                 | (3.4 
|Asbestos-related insurance recoveries                                                           |  |                                 | 23.0 
|Payments for asbestos related claims                                                            |  |                                 | (9.0 
|Charge for asbestos liability, net                                                              |  |                                 | 81.0 
|Cash effect of hedging activities                                                               |  |                                 | (9.7 
|Changes in operating assets and liabilities net of effects of reorganizations and restructuring |  |                                 |      
|(Increase) in receivables                                                                       |  |                                 | (32.8
|(Increase)/decrease in inventories                                                              |  |                                 | (13.3
|(Increase) in other current assets                                                              |  |                                 | (0.7 
|(Increase) in other noncurrent assets                                                           |  |                                 | (11.2
|Increase/(decrease) in accounts payable and accrued expenses                                    |  |                                 | (14.4
|Increase in income taxes payable                                                                |  |                                 | 31.0 
|Increase in other long-term liabilities                                                         |  |                                 | 6.5  
|Other, net                                                                                      |  |                                 | 0.5  
|                                                                                                |  |                                 |      
|Net cash provided by operating activities                                                       |  |                                 | 90.6 
|                                                                                                |  |                                 |      
|Cash flows from investing activities:                                                           |  |                                 |      
|Purchases of property, plant and equipment and computer software                                |  |                                 | (55.6
|Distributions from equity affiliates                                                            |  |                                 | 12.0 
|Proceeds from the sale of assets                                                                |  |                                 | 1.8  
|                                                                                                |  |                                 |      
|Net cash (used for) investing activities                                                        |  |                                 | (41.8
|                                                                                                |  |                                 |      
|Cash flows from financing activities:                                                           |  |                                 |      
|Increase/(decrease) in short-term debt, net                                                     |  |                                 | (3.8 
|Payments of long-term debt                                                                      |  |                                 | (3.1 
|Other, net                                                                                      |  |                                 | (0.6 
|                                                                                                |  |                                 |      
|Net cash (used for) financing activities                                                        |  |                                 | (7.5 
|                                                                                                |  |                                 |      
|Effect of exchange rate changes on cash and cash equivalents                                    |  |                                 | 4.6  
|                                                                                                |  |                                 |      
|Net increase in cash and cash equivalents                                                       |  | $                               | 45.9 
|Cash and cash equivalents at beginning of year                                                  |  |                                 | 380.0
|                                                                                                |  |                                 |      
|Cash and cash equivalents at end of period                                                      |  | $                               | 425.9
|                                                                                                |  |                                 |      



See accompanying notes to condensed
consolidated financial statements beginning on page 34.



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##### Table of Contents

Armstrong World Industries, Inc., and Subsidiaries

Notes to Condensed Consolidated Financial Statements



NOTE 1. BASIS OF PRESENTATION



Armstrong World Industries, Inc. (AWI) is a Pennsylvania corporation incorporated in 1891, which together with its subsidiaries is referred to here as Armstrong. Through its U.S. operations and U.S. and international
subsidiaries, Armstrong designs, manufactures and sells flooring products (resilient, wood, carpeting and sports flooring) as well as ceiling systems, around the world. Armstrong products are sold primarily for use in the finishing, refurbishing and
repair of residential, commercial and institutional buildings. Armstrong also designs, manufactures and sells kitchen and bathroom cabinets to single and multi-family homebuilders and remodelers.



Armstrong Holdings, Inc. (which together with its subsidiaries is referred to here as
AHI) is the publicly held parent holding company of Armstrong. Armstrong Holdings, Inc. became the parent company of Armstrong on May 1, 2000, following AWI shareholder approval of a plan of exchange under which each share of AWI was
automatically exchanged for one share of Armstrong Holdings, Inc. Armstrong Holdings, Inc. was formed for purposes of the share exchange and holds no other significant assets or operations apart from AWI and AWIs subsidiaries. Stock
certificates that formerly represented shares of AWI were automatically converted into certificates representing the same number of shares of Armstrong Holdings, Inc. The publicly held debt of AWI was not affected in the transaction.



The accounting policies used in preparing these statements are the same as those used in
preparing Armstrongs consolidated financial statements for the year ended December 31, 2002, which includes the accounts of Armstrong and its majority-owned subsidiaries. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto included in Armstrongs Form 10-K for the fiscal year ended December 31, 2002. In the opinion of management, all adjustments of a normal recurring nature have been
included to provide a fair statement of the results for the reporting periods presented. Quarterly results are not necessarily indicative of annual earnings, primarily due to the different level of sales in each quarter of the year and the
possibility of changes in general economic conditions.



Operating results for
the third quarter and nine months of 2003 and the corresponding periods of 2002 included in this report are unaudited. Certain prior year amounts have been reclassified to conform to the current year presentation.



Effective January 1, 2003, Armstrong adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, which provides guidance on the accounting and disclosure for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Armstrongs current results of
operations and financial position have not been affected.



Effective January 1,
2003, Armstrong adopted SFAS No. 146, Accounting for Costs Associated with Exit of Disposal Activities, which addresses accounting for restructuring and similar costs. This standard affects the timing of expenses associated with
restructurings, but is not expected to change the long-term results of operations and financial position.



Effective July 1, 2003, Armstrong adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which addresses accounting for certain financial
instruments with characteristics of both liabilities and equity. Armstrongs current results of operations and financial position have not been affected.



Effective January 1, 2003, Armstrong adopted Emerging Issues Task Force (EITF) Issue No. 02-16, Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor, which provides guidance on the accounting for consideration received from a vendor. Armstrongs current results of operations and financial position have not been affected.



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##### Table of Contents

In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The disclosure requirements were adopted December 31, 2002. The recognition and initial measurement provisions were adopted January 1, 2003. Armstrongs current
results of operations and financial position have not been affected.



In
January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. The requirements for variable interest entities created after January 31, 2003 were adopted on February 1, 2003. Armstrongs current
results of operations and financial position have not been affected. The FASB deferred the effective date of the requirements for existing variable interest entities until the fourth quarter of 2003. While Armstrong is finalizing its review,
adoption in the fourth quarter of 2003 is not anticipated to have an impact on Armstrongs consolidated results of operations or financial position.



NOTE 2. STOCK-BASED COMPENSATION



Effective December 31, 2002, Armstrong adopted SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, which requires the
following disclosure in annual and interim reports. The following table illustrates the effect on net income if Armstrong had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-based
Compensation, to stock-based employee compensation.



|                                                                                                                                            |  | Three MonthsEndedSeptember 30, |      |   | Nine Months Ended September 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---- | - | ------------------------------- | -
|(amounts in millions)                                                                                                                       |  | 2003                           |      |   | 2002                            |  
|Net income (loss), as reported                                                                                                              |  | $                              | (4.7 | ) |                                 | $
|Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax
effects                           |  |                                |     |   |                                 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of
related tax effects |  |                                |     |   |                                 |  
|                                                                                                                                            |  |                                |      |   |                                 |  
|Pro forma net income (loss)                                                                                                                 |  | $                              | (4.7 | ) |                                 | $
|                                                                                                                                            |  |                                |      |   |                                 |  



NOTE 3. CHAPTER 11 REORGANIZATION



On December 6, 2000, AWI,
the major operating subsidiary of AHI, filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S. Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware
(the Court) in order to use the court-supervised reorganization process to achieve a resolution of the AWI asbestos liability. Also filing under Chapter 11 were two of Armstrongs wholly-owned subsidiaries, Nitram Liquidators, Inc.
(Nitram) and Desseaux Corporation of North America, Inc. (Desseaux, and together with AWI and Nitram, the Debtors). The Chapter 11 cases are being jointly administered under case numbers 00-4469, 00-4470, and
00-4471 (the Chapter 11 Case).



AHI, and Armstrongs other
subsidiaries, including Triangle Pacific Corp. (now Armstrong Wood Products Inc.), WAVE (Armstrongs ceiling grid systems joint venture with Worthington Industries), Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating
subsidiaries were not a part of the Filing. Asbestos-related claims against any of these non-debtor entities are not addressed in the Chapter 11 proceedings unless they are personal injury derivative liabilities of AWI.



AWI is operating its business and managing its properties as a debtor-in-possession subject
to the provisions of the Bankruptcy Code. Pursuant to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date (prepetition claims) unless specifically authorized by the Court.
Similarly, claimants may not enforce any claims against AWI that



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arose prior to the date of the Filing unless specifically authorized by the Court. In addition, as a debtor-in-possession, AWI has the right, subject to the
Courts approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the Filing. Parties having claims as a result of any such rejection may file claims with the Court, which will be dealt with as part
of the Chapter 11 Case.



Three creditors committees, one representing
asbestos personal injury claimants (the Asbestos Personal Injury Claimants Committee), one representing asbestos property damage claimants (the Asbestos Property Damage Committee), and the other representing other
unsecured creditors (the Unsecured Creditors Committee), were appointed in the Chapter 11 Case. Based on the settlement of all remaining asbestos-related property damage claims as described below, the Asbestos Property Damage
Committee has been disbanded. In addition, an individual has been appointed to represent the interests of future asbestos personal injury claimants (the Future Claimants Representative). In accordance with the provisions of the
Bankruptcy Code, these parties have the right to be heard on matters that come before the Court in the Chapter 11 Case.



Plan of Reorganization



On November 4, 2002, AWI filed a Plan of Reorganization with the Court. AWI has since filed several amended plans of reorganization with the Court, along with selected
exhibits. The fourth amended Plan of Reorganization, with certain exhibits, was filed on May 23, 2003 (as so amended, it is referred to in this report as the POR). The POR has been endorsed by AHIs Board of Directors and is
supported by the Asbestos Personal Injury Claimants Committee, the Unsecured Creditors Committee and the Future Claimants Representative. The POR provides for AWI to continue to conduct its existing lines of business with a
reorganized capital structure, under which, among other things, its existing shares will be cancelled and new common shares and notes will be issued to its unsecured creditors and to a trust to be established under the POR for the benefit of
AWIs current and future asbestos personal injury claimants, in full satisfaction of their claims against AWI, as further discussed below. The POR excludes Armstrongs Nitram and Desseaux subsidiaries.



The POR was mailed to creditors for voting in June 2003. The Court extended the deadline for
creditors to vote on the POR from September 22, 2003 to October 31, 2003. The Court received 17 objections to the POR from creditors by the September 22, 2003 deadline. AWI has resolved or filed responses to these objections and believes that many
of these objections will be addressed prior to the Confirmation hearing. Technical modifications to the fourth amended Plan of Reorganization were filed on October 17, 2003.



Implementation of the POR and the treatment of claims and interests as provided therein are subject to confirmation of the POR in accordance
with the provisions of the Bankruptcy Code. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. See Next Steps in the Chapter 11 Process section for further discussion.



Disclosure Statement



On December 20, 2002, a proposed disclosure statement with respect to the POR was filed with
the Court. On December 26, 2002, AWI filed projected financial information with the Court as an exhibit to the disclosure statement (therein known as Exhibit C). Following various amendments, on May 30, 2003, the Court approved the
Disclosure Statement (as so amended, it is referred to in this report as the Disclosure Statement) and it was distributed by AWI with the POR for creditor voting on the POR in June 2003.



As indicated in the Disclosure Statement and its exhibits, the projected financial
information and various estimates of value therein discussed (as previously submitted or as to be revised) should not be regarded as representations or warranties by AWI, AHI or any other person as to the accuracy of such information or that any
such projection or valuation will be realized. The information in the Disclosure Statement, including the projected financial information and estimates of value, was prepared by AWI and its financial advisors. This information has not been audited
or reviewed by independent accountants. The Disclosure Statement discusses the significant assumptions used in preparation of the projected financial information and estimates of value.



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The discussions of the POR and Disclosure Statement in this report are qualified by reference to the full text of those
documents as filed with the Court and filed for reference purposes with the Securities and Exchange Commission. The POR and Disclosure Statement are available at www.armstrongplan.com, where additional information will be posted as it becomes
available.



Asbestos Personal Injury
Trust



A principal feature of the POR is the creation of a trust (the
Asbestos PI Trust), pursuant to section 524(g) of the Bankruptcy Code, to which all AWI present and future asbestos-related personal injury claims, including contribution claims of co-defendants, will be channeled. In accordance with the
524(g) injunction to be issued by the Court in connection with the confirmation of the POR, various entities will be protected from suit on account of AWI present and future asbestos-related personal injury claims. These entities
include, among others, AWI, reorganized AWI, AHI, AWIs affiliates, and their respective officers and directors. Claims resolution procedures to be utilized by the Asbestos PI Trust have been developed. These procedures will govern the
allowance and payment by the Asbestos PI Trust of these AWI present and future asbestos-related personal injury claims. The Asbestos PI Trust will be funded with AWIs rights to insurance providing coverage for asbestos-related personal injury
claims, as well as a share of cash, notes, and common stock to be issued under the POR to creditors, as described below.



Consideration to Be Distributed under the POR



The Asbestos PI Trust and the holders of unsecured claims will share in the POR consideration that is made up of the following components:



| |  | Available Cash, which is comprised of:
| | - | --------------------------------------



| |  | Cash available on the effective date of the POR after reserving up to $100 million to fund ongoing operations and making provisions for certain required payments under the POR,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Any cash drawn, at AWIs sole discretion, under an exit finance facility for the purpose of funding distributions under the POR, and
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| |  | Certain insurance proceeds related to environmental matters
| | - | -----------------------------------------------------------



However, proceeds received under any private offering of debt securities and/or secured term loan borrowings, shall be excluded from the determination of
Available Cash.



| |  | Plan Notes of reorganized AWI and/or net proceeds from any private offerings of debt securities, and
| | - | ----------------------------------------------------------------------------------------------------



| |  | Substantially all of the new common stock of reorganized AWI
| | - | ------------------------------------------------------------



The total amount of Plan Notes will be the greater of (i) $1.125 billion less Available Cash and (ii) $775 million. However, AWI will use reasonable efforts to issue one
or more private offerings of debt securities on, or as soon as practicable after, the Effective Date that would yield net proceeds at least equal to the amount of the Plan Notes prescribed by the Plan. If the private offerings are successful, the
Plan Notes would not be issued. If the offerings yield proceeds less than the amount of the Plan Notes prescribed by the Plan, AWI will issue Plan Notes equal to the difference. The private offerings, if issued, will not be registered under the
Securities Act of 1933 and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements. If only the Plan Notes are issued, AWI expects to issue an aggregate amount of $775 million Plan Notes.
These Plan Notes will consist of (i) a tranche of notes with a seven-year maturity and a fixed interest rate, (ii) a tranche of notes with a ten-year maturity and a fixed interest rate and (iii) a tranche of floating rate notes with a maturity of
not less than five years, but no more than ten years, structured in a manner similar to, and as liquid as, marketable bank debt which satisfy the requirements of the POR and are on terms and conditions that are mutually satisfactory to AWI and the
Asbestos PI Claimants Committee, the Future Claimants Representative, and, if unsecured claimants, other than convenience claimants, vote to accept the POR, the Unsecured Creditors Committee.



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The POR provides that unsecured creditors, other than convenience creditors described below, will receive their pro rata
share of:



| |  |  | 34.43% of the new common stock of reorganized AWI,
| | - |  | --------------------------------------------------



| |  |  | 34.43% of the first $1.05 billion of
| | - |  | ------------------------------------



| |  | Up to $300 million of Available Cash and
| | - | ----------------------------------------



| |  | The principal amount of each series of Plan Notes and/or net cash proceeds from any private debt offerings of debt securities.
| | - | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | 60% of the next $50 million of Available Cash and, if such Available Cash is less than $50 million, then 60% of each series of Plan Notes and/or net cash proceeds from any private
debt offerings of debt securities, in an amount equal to the difference between $50 million and the amount of such Available Cash, and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 34.43% of the remaining amount of Available Cash and each series of Plan Notes and/or net cash proceeds from any private debt offerings of debt securities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



The remaining amount of new common stock of reorganized AWI, Available Cash and Plan Notes
and/or net cash proceeds from any private debt offerings of debt securities will be distributed to the Asbestos PI Trust.



Under the POR, unsecured creditors whose claims (other than debt securities) are less than $10,000 or who elect to reduce their claims to $10,000 will be treated as
convenience creditors and will receive payment of 75% of their allowed claim amount in cash.



Under the POR, the existing equity interests in AWI will be cancelled. The POR provides for the distribution, with respect to existing equity, of warrants to purchase shares of reorganized AWI (the
Warrants). The terms of the Warrants are provided in an exhibit to the POR. The Warrants:



| |  |  | Would constitute 5% of the common stock of reorganized AWI on a fully diluted basis, upon exercise of all the Warrants;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Would have a scheduled 7-year exercisable term from the effective date of the POR; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Would contain an exercise price equal to 125% of the per share equity value of reorganized AWI, as agreed among the financial advisers for AWI, the Asbestos Personal Injury
Claimants Committee, the Unsecured Creditors Committee, and the Future Claimants Representative, as set forth in the Court-approved disclosure statement for the POR.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Warrants are estimated to have a value on the effective date of the POR of approximately
$35 million to $40 million. Whether any value will be realized from the Warrants will depend on circumstances after they are issued, particularly whether the market value of the reorganized AWIs new common stock reaches a value in excess of
the exercise price of the Warrants during the period that they may be exercised.



AHIs shareholders are not entitled to vote on the POR. However, AHIs shareholders have been sent a copy of the Disclosure Statement. If the POR is implemented, the only value that will be available to AHI shareholders is their
ratable share of the Warrants. AHI intends to distribute the Warrants to its shareholders if AHIs Plan of Dissolution (see discussion below) is approved by AHIs shareholders.



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Valuation of Reorganized AWI for Purposes of the POR



In the Disclosure Statement, which assumed an Effective Date of the POR of July 1, 2003, and
based on estimates of the fair value of reorganized AWI, the total value of consideration to be distributed to the Asbestos PI Trust, other than the asbestos product liability insurance policies, will be approximately $1.8 billion, and the total
value of consideration to be distributed to holders of allowed unsecured claims (other than convenience claims) will be approximately $0.9 billion. Based upon the estimated value of the POR consideration and AWIs estimate that unsecured claims
allowed by the Court (other than convenience claims) will total approximately $1.65 billion, AWI estimates that holders of allowed unsecured claims (other than convenience claims) will receive a recovery having a value equal to approximately 59.5%
of their allowed claims. AWIs estimates of the consideration and potential recoveries are based upon many assumptions, including:



| |  | The estimated reorganization value for AWI is between $2.4 billion and $3.0 billion (with a midpoint of $2.7 billion);
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | The estimated equity value of new common stock is between $24.66 and $35.30 per share with a midpoint of $30.00 per share (assuming a distribution of 56.4 million shares of new
common stock to holders of unsecured claims and the Asbestos PI Trust);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Plan Notes will be in the aggregate principal amount of $775 million and are worth their face value
| | - | -------------------------------------------------------------------------------------------------------



| |  | AWI expects to have Available Cash of approximately $350 million; and
| | - | ---------------------------------------------------------------------



| |  | The estimated value of the Warrants is between $35 million and $40 million
| | - | --------------------------------------------------------------------------



The estimated reorganization value was reduced from previously reported amounts based on revised projected financial information that incorporated updated economic
conditions.



AHIs Plan of
Dissolution, Winding Up and Distribution (Plan of Dissolution)



In connection with the consummation of the POR, the existing equity interests in AWI will be cancelled, the new common stock of reorganized AWI will be issued to AWIs unsecured creditors and the Asbestos PI Trust and the Warrants will
be issued to AHI (or a wholly-owned subsidiary of AHI). The Board of Directors of AHI has determined that it is not practicable for AHI to continue in operation as an on-going business owning the Warrants, which will then be AHIs only asset.
The POR contemplates, and the Board of Directors of AHI has approved and recommended, that AHI shareholders voluntarily dissolve AHI and adopt a plan for winding up its affairs in accordance with Pennsylvania law and, subject to completion of
AHIs winding up, distributing the Warrants to the shareholders. A special meeting of AHI shareholders has been called to vote on the Plan of Liquidation on December 3, 2003, and appropriate materials regarding such meeting have been sent to
AHIs shareholders. If the Plan of Dissolution is not approved by AHIs shareholders, AHI will not distribute the Warrants to AHIs shareholders and the Board of Directors will determine how to proceed under the circumstances. One
alternative in such event may be for AHI to seek involuntary dissolution by order of, and under the supervision of, a Pennsylvania court. The POR provides that reorganized AWI will pay costs and expenses incurred in connection with seeking AHI
shareholder approval of the Plan of Dissolution and, if so approved, of administering AHIs Plan of Dissolution. Reorganized AWI will otherwise have no responsibility for AHIs on-going costs. .



Other Matters



In another companys asbestos-related Chapter 11 case, a motion for recusal has been
filed against Judge Alfred M. Wolin, who is jointly administering the asbestos issues in five companies Chapter 11 cases, including AWI. Judge Wolin has not yet ruled on the recusal motion. AWI is uncertain as to the merits of the motion, and
what impact, if any, this motion will have on AWIs Chapter 11 proceedings.



Next Steps in the Chapter 11 Process



Following the creditor voting, the Court will hold a hearing to consider confirmation of the POR. It is anticipated that such hearing will be on November 17 and 18, 2003.
If the Court confirms the POR in November, AWI could emerge from Chapter 11 protection as soon as the end of 2003. Of course, there can be no certainty that all such events will occur, or if they do, that they will occur in accordance with such
timeframes.



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Common Stock and Debt Securities



As a result of AWI filing the Plan of Reorganization on November 4, 2002, the New York Stock
Exchange stopped trading on the Exchange of the common stock of AHI (traded under the ticker symbol ACK) and two debt securities of AWI (traded under the ticker symbols AKK and ACK 08). AHIs common stock has
resumed trading in the over-the-counter (OTC) Bulletin Board under the ticker symbol ACKHQ and one of AWIs debt securities has resumed trading under the ticker symbol AKKWQ.



Bar Date for Filing Claims



The Court established August 31, 2001 as the bar date for all claims against AWI except for
asbestos-related personal injury claims and certain other specified claims. A bar date is the date by which claims against AWI must be filed if the claimants wish to participate in any distribution in the Chapter 11 Case. The Court had extended the
bar date for claims from several environmental agencies until the third quarter of 2003. A bar date for asbestos-related personal injury claims (other than claims for contribution, indemnification, or subrogation) has been rendered unnecessary under
the terms of the POR, which defers such filings until the establishment of a trust to administer such claims.



Approximately 4,700 proofs of claim (including late-filed claims) totaling approximately $6.3 billion alleging a right to payment from AWI were filed with the Court in response to the August 31, 2001 bar date, which
are discussed below. AWI continues to investigate claims. The Court will ultimately determine liability amounts that will be allowed as part of the Chapter 11 process.



In its ongoing review of the filed claims, AWI has identified and successfully objected to approximately 2,000 claims totaling $2.1 billion.
These claims were primarily duplicate filings, claims that were subsequently amended or claims that are not related to AWI. The Court disallowed these claims with prejudice.



Approximately 1,000 proofs of claim totaling approximately $1.8 billion are pending with the Court that are associated with asbestos-related
personal injury litigation, including direct personal injury claims, claims by co-defendants for contribution and indemnification, and claims relating to AWIs participation in the Center for Claims Resolution (the Center). As
stated above, the bar date of August 31, 2001 did not apply to asbestos-related personal injury claims other than claims for contribution, indemnification, or subrogation. The POR contemplates that all AWI asbestos-related personal injury claims,
including claims for contribution, indemnification, or subrogation, will be addressed in the future pursuant to the procedures to be developed in connection with the POR. See further discussion regarding AWIs liability for asbestos-related
matters in Note 11.



During the first six months of 2003, AWI settled all of
the approximately 460 remaining property damage claims that alleged damages of $0.8 billion, for approximately $9 million. Payments to claimants were made during the third quarter of 2003 and were funded by insurance. See Note 10 for further
discussion of property damage litigation.



Approximately 1,200 claims totaling
approximately $1.6 billion alleging a right to payment for financing, environmental, trade debt and other claims are pending with the Court. For these categories of claims, AWI has previously recorded approximately $1.6 billion in liabilities. AWI
continues to investigate the claims to determine their validity.



AWI continues
to evaluate claims filed in the Chapter 11 Case. AWI has recorded liability amounts for claims whose value can be reasonably estimated and which it believes are probable of being allowed by the Court. During the fourth quarter of 2002, AWI recorded
a $2.5 billion charge to increase its estimate of probable asbestos-related liability for personal injury claims based on the developments in the Chapter 11 Case. See Note 11 for further discussion. At this time, it is impossible to reasonably
estimate the value of all the claims that will ultimately be allowed by the Court. However, it is likely the value of the claims ultimately allowed by the Court will be different than amounts presently recorded by AWI and could be material to
AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and make changes to the recorded liability if and when it is
appropriate.



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Financing



On November 1, 2002, the Court announced it had approved AWIs motion to reduce the amount of its debtor-in-possession credit facility
(the DIP Facility) from $200 million to $75 million, eliminate the revolving credit borrowing feature, retain the letter of credit issuance facility and extend the maturity date to December 8, 2003. On September 29, 2003, the Court
approved the extension of the maturity date of the DIP Facility to December 8, 2004. As of September 30, 2003, AWI had approximately $32.6 million in letters of credit which were issued pursuant to the DIP Facility. As of September 30, 2003, AWI had
$263.2 million of cash and cash equivalents, excluding cash held by its non-debtor subsidiaries. AWI believes that cash on hand and generated from operations and dividends from its subsidiaries, together with lines of credit and the DIP Facility,
will be adequate to address its foreseeable liquidity needs. Obligations under the DIP Facility, including reimbursement of draws under the letters of credit, if any, constitute superpriority administrative expense claims in the Chapter 11 Case.



Accounting Impact



AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization
under the Bankruptcy Code (SOP 90-7) provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code. This guidance is implemented in the accompanying consolidated financial statements.



Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities
that are subject to compromise and report them separately on the balance sheet. See Note 5 for detail of the liabilities subject to compromise at September 30, 2003 and December 31, 2002. Liabilities that may be affected by a plan of reorganization
are recorded at the expected amount of the allowed claims, even if they may be settled for lesser amounts. Substantially all of AWIs prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to
compromise. Obligations of Armstrong subsidiaries not covered by the Filing remain classified on the condensed consolidated balance sheet based upon maturity date. AWIs estimated liability for asbestos-related personal injury claims is also
recorded in liabilities subject to compromise. See Note 11 for further discussion of AWIs asbestos liability.



Additional prepetition claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the
allowance of contingent or disputed claims.



SOP 90-7 also requires separate
reporting of all revenues, expenses, realized gains and losses, and provision for losses related to the Filing as Chapter 11 reorganization costs, net. Accordingly, AWI recorded the following Chapter 11 reorganization activities during the first
nine months of 2003 and 2002:



|(amounts in millions)                             |  | 2003 |      |   | 2002 |  
|------------------------------------------------- |  | ---- | ---- | - | ---- | -
|Professional fees                                 |  | $    | 19.0 |   |      | $
|Interest income, post petition                    |  |      | (2.4 | ) |      |  
|Reductions to prepetition liabilities             |  |      | (0.5 | ) |      |  
|Other expense directly related to bankruptcy, net |  |      | 0.1  |   |      |  
|                                                  |  |      |      |   |      |  
|Total Chapter 11 reorganization costs, net        |  | $    | 16.2 |   |      | $
|                                                  |  |      |      |   |      |  



Professional fees represent legal and
financial advisory fees and expenses directly related to the Filing.



Interest
income is earned from short-term investments of cash subsequent to the Filing. Reductions to prepetition liabilities represent Court approved settlements of prepetition liabilities.



As a result of the Filing, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a
debtor-in-possession, AWI may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Although a POR and Disclosure Statement have been filed with the
Court, implementation of the POR is subject to



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confirmation of the POR in accordance with the provisions of the Bankruptcy Code. AWI is unable to predict when and if the POR will be confirmed. Therefore,
the timing and terms of a resolution of the Chapter 11 Case remain uncertain. Further, a confirmed plan of reorganization could materially change the amounts and classifications reported in the consolidated financial statements.



NOTE 4. SEGMENT RESULTS



(amounts in millions)



|                                           |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|------------------------------------------ |  | -------------------------------- | ----- | - | ------------------------------- | -
|Net sales to external customers            |  | 2003                             |       |   | 2002                            |  
|Resilient Flooring                         |  | $                                | 315.6 |   |                                 | $
|Wood Flooring                              |  |                                  | 183.7 |   |                                 |  
|Textiles and Sports Flooring               |  |                                  | 73.3  |   |                                 |  
|Building Products                          |  |                                  | 227.9 |   |                                 |  
|Cabinets                                   |  |                                  | 50.9  |   |                                 |  
|                                           |  |                                  |       |   |                                 |  
|Total sales to external customers          |  | $                                | 851.4 |   |                                 | $
|                                           |  |                                  |       |   |                                 |  
|                                           |  |                                 
|                                           |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|Segment operating income (loss)            |  | 2003                             |       |   | 2002                            |  
|Resilient Flooring                         |  | $                                | 20.8  |   |                                 | $
|Wood Flooring                              |  |                                  | (9.9  | ) |                                 |  
|Textiles and Sports Flooring               |  |                                  | 0.2   |   |                                 |  
|Building Products                          |  |                                  | 32.4  |   |                                 |  
|Cabinets                                   |  |                                  | (3.2  | ) |                                 |  
|All Other                                  |  |                                  | 0.5   |   |                                 |  
|                                           |  |                                  |       |   |                                 |  
|Total segment operating income             |  |                                  | 40.8  |   |                                 |  
|Unallocated Corporate (expense)            |  |                                  | (23.0 | ) |                                 |  
|                                           |  |                                  |       |   |                                 |  
|Total consolidated operating Income (loss) |  | $                                | 17.8  |   |                                 | $
|                                           |  |                                  |       |   |                                 |  



|Segment assets                  |  | September 30, 2003 |         | December 31, 2002
|------------------------------- |  | ------------------ | ------- | -----------------
|Resilient Flooring              |  | $                  | 917.1   |                  
|Wood Flooring                   |  |                    | 614.5   |                  
|Textiles and Sports Flooring    |  |                    | 212.6   |                  
|Building Products               |  |                    | 551.4   |                  
|Cabinets                        |  |                    | 110.3   |                  
|All Other                       |  |                    | 20.0    |                  
|                                |  |                    |         |                  
|Total segment assets            |  |                    | 2,425.9 |                  
|Assets not assigned to segments |  |                    | 2,118.5 |                  
|                                |  |                    |         |                  
|Total consolidated assets       |  | $                  | 4,544.4 |                  
|                                |  |                    |         |                  



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NOTE 5. LIABILITIES SUBJECT TO COMPROMISE



As a result of AWIs Chapter 11 filing (see Note 3), pursuant to SOP 90-7, AWI is
required to segregate prepetition liabilities that are subject to compromise and report them separately on the balance sheet. Liabilities that may be affected by a plan of reorganization are recorded at the amount of the expected allowed claims,
even if they may be settled for lesser amounts. Substantially all of AWIs prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of Armstrong subsidiaries not covered
by the Filing remain classified on the consolidated balance sheet based upon maturity date. AWIs asbestos liability is also recorded in liabilities subject to compromise. See Note 3 for further discussion on how the Chapter 11 process may
address AWIs liabilities subject to compromise and Note 11 for further discussion of AWIs asbestos liability.



Liabilities subject to compromise at September 30, 2003 and December 31, 2002 are as follows:



|(amounts in millions)                           |  | September 30, 2003 |         | December 31, 2002
|----------------------------------------------- |  | ------------------ | ------- | -----------------
|Debt (at face value)                            |  | $                  | 1,400.7 |                  
|Asbestos-related liability                      |  |                    | 3,190.6 |                  
|Prepetition trade payables                      |  |                    | 58.7    |                  
|Prepetition other payables and accrued interest |  |                    | 60.6    |                  
|Amounts due to affiliates                       |  |                    | 4.7     |                  
|ESOP loan guarantee                             |  |                    | 157.7   |                  
|                                                |  |                    |         |                  
|Total liabilities subject to compromise         |  | $                  | 4,873.0 |                  
|                                                |  |                    |         |                  



Additional prepetition claims
(liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.



NOTE 6. INVENTORIES



(amounts in millions)



|                             |  | September 30, 2003 |       |   | December 31, 2002 |  
|---------------------------- |  | ------------------ | ----- | - | ----------------- | -
|Finished goods               |  | $                  | 328.5 |   |                   | $
|Goods in process             |  |                    | 51.8  |   |                   |  
|Raw materials and supplies   |  |                    | 158.4 |   |                   |  
|Less LIFO and other reserves |  |                    | (77.6 | ) |                   |  
|                             |  |                    |       |   |                   |  
|Total inventories, net       |  | $                  | 461.1 |   |                   | $
|                             |  |                    |       |   |                   |  



NOTE 7. GOODWILL AND INTANGIBLE
ASSETS



The following table represents the changes in goodwill since
December 31, 2002.



(amounts in millions)



|Goodwill by segment         |  | January 1, 2003 |       | Adjustments, net(1) |   | Impairments |  | September 30, 2003
|--------------------------- |  | --------------- | ----- | ------------------- | - | ----------- |  | ------------------
|Resilient Flooring          |  | $               | 89.3  |                     | $ | 8.7         |  | $                 
|Wood Flooring               |  |                 | 113.8 |                     |   |            |  |                   
|Building Products           |  |                 | 11.9  |                     |   | 1.0         |  |                   
|Cabinets                    |  |                 | 12.6  |                     |   |            |  |                   
|                            |  |                 |       |                     |   |             |  |                   
|Total consolidated goodwill |  | $               | 227.6 |                     | $ | 9.7         |  | $                 
|                            |  |                 |       |                     |   |             |  |                   

---

|(1) | Effects of foreign exchange
|--- | ---------------------------



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The following table details amounts related to Armstrongs intangible assets as of September 30, 2003 and December
31, 2002.



|                              |  | September 30, 2003    |       | December 31, 2002       
|----------------------------- |  | --------------------- | ----- | ------------------------
|(amounts in millions)         |  | Gross Carrying Amount |       | Accumulated Amortization
|Amortized intangible assets   |  |                       |       |                         
|Computer software             |  | $                     | 101.3 |                         
|Land use rights and other     |  |                       | 4.4   |                         
|                              |  |                       |       |                         
|Total                         |  | $                     | 105.7 |                         
|                              |  |                       |       |                         
|Unamortized intangible assets |  |                       |       |                         
|Trademarks and brand names    |  | $                     | 29.2  |                         
|                              |  |                       |       |                         
|Total intangible assets       |  | $                     | 134.9 |                         
|                              |  |                       |       |                         



|Aggregate Amortization Expense               |  |   |     
|-------------------------------------------- |  | - | ----
|For the nine months ended September 30, 2003 |  | $ | 12.2
|For the nine months ended September 30, 2002 |  | $ | 10.4



NOTE 8. RESTRUCTURING AND OTHER ACTIONS



In July 2003,
Armstrong announced its plans to close the Wood Flooring manufacturing location in Port Gibson, Mississippi, effective September 2003, due to excess production capacity. The production has been transferred to another Wood Flooring location,
resulting in a net reduction of approximately 145 positions. Charges of $15.6 million, primarily related to accelerated depreciation, were recorded in the third quarter of 2003 as a component of cost of sales.



A $3.7 million restructuring charge was recorded in the third quarter of 2003. The charge
related primarily to severance benefits for approximately 72 employees in a Textiles and Sports Flooring plant in the Netherlands, as part of the continuing 2002 restructuring plan to consolidate certain functions in the European flooring business.
Separately, $0.8 million of the remaining reserve related to a noncancelable operating lease in the U.K. was reversed in the Unallocated Corporate segment as a result of reaching agreement with outside parties on future rent increases and disputed
rent payments by a sublessee. $0.2 million of the remaining accruals from the second quarter 2003 and second quarter 2002 charges in the Resilient Flooring segment was also reversed, comprising certain severance accruals that were no longer
necessary.



A $1.3 million restructuring charge was recorded in the second
quarter of 2003. The charge related primarily to severance benefits for approximately 11 employees in the Textiles and Sports Flooring ($0.7 million) and Resilient Flooring ($0.6 million) segments, as part of the continuing restructuring plan to
consolidate certain functions in the European flooring business. In addition, $0.4 million of the remaining accrual from the second quarter 2002 charge in the Resilient Flooring segment was reversed, comprising certain severance accruals that were
no longer necessary.



A $3.2 million restructuring charge was recorded in the
first quarter of 2003. The charge related to severance benefits for approximately 52 employees in the Textiles and Sports Flooring ($2.3 million) and Resilient Flooring ($0.9 million) segments, as part of the restructuring plan to consolidate
certain functions in the European flooring business.



In the third quarter of
2002, $0.6 million of the remaining accrual related to the first quarter 2002 and fourth quarter 2001 charges in the Textiles and Sports Flooring segment was reversed, comprising certain severance accruals that were no longer necessary.



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A $2.2 million restructuring charge was recorded in the second quarter of 2002. The charge primarily related to severance
benefits for approximately 120 employees in the European Resilient Flooring business due to a slow European economy and a consolidation of worldwide research and development activities. Of the $2.2 million, $0.4 million represented a non-cash charge
for enhanced retirement benefits, which is accounted for as an increase to pension benefit liabilities.



A $0.5 million restructuring charge was recorded in the first quarter of 2002. The charge related to severance benefits for 11 employees in the Textiles and Sports Flooring segment to reflect staffing needs for
current business conditions and continued efforts initiated in the fourth quarter of 2001.



The following table summarizes activity in the reorganization and restructuring accruals for the first nine months of 2003 and 2002. The net amount of charges and reversals in the table does not agree to the income
statement due to non-cash charges for enhanced retirement benefits that did not affect the restructuring accrual accounts.



|(amounts in millions) |  | Beginning Balance |     | Cash Payments |      |   | Charges |     | Reversals |      |   | Other |     | Ending Balance
|--------------------- |  | ----------------- | --- | ------------- | ---- | - | ------- | --- | --------- | ---- | - | ----- | --- | --------------
|2003                  |  | $                 | 9.1 |               | (3.4 | ) |         | 8.2 |           | (1.4 | ) |       | 0.6 |               
|2002                  |  |                   | 8.9 |               | (1.2 | ) |         | 2.3 |           | (0.6 | ) |       | 0.3 |               



The amount in other for
2003 and 2002 is primarily related to foreign currency translation.



Substantially all of the remaining balance of the restructuring accrual as of September 30, 2003 relates to a noncancelable-operating lease, which extends through 2017, and severance for terminated employees with extended payouts, the
majority of which will be paid by the second quarter of 2004.



NOTE 9. PRODUCT WARRANTIES



Armstrong
provides direct customer and end-user warranties for its products. These warranties cover manufacturing defects that would prevent the product from performing in line with its intended and marketed use. Generally, the terms of these warranties range
up to 25 years and provide for the repair or replacement of the defective product. Armstrong collects and analyzes warranty claims data with a focus on the historical amount of claims, the products involved, the amount of time between the warranty
claims and their respective sales and the amount of current sales. The following table illustrates the activity for product warranties for the first nine months of 2003 and 2002:



|(amounts in millions)                   |  | 2003 |       |   | 2002 |  
|--------------------------------------- |  | ---- | ----- | - | ---- | -
|Balance at January 1                    |  | $    | 22.7  |   |      | $
|Reductions for payments                 |  |      | (29.5 | ) |      |  
|Current year warranty accruals          |  |      | 31.0  |   |      |  
|Preexisting warranty accrual changes    |  |      | (0.3  | ) |      |  
|Effects of foreign exchange translation |  |      | 0.9   |   |      |  
|                                        |  |      |       |   |      |  
|Balance at September 30                 |  | $    | 24.8  |   |      | $
|                                        |  |      |       |   |      |  



NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION



|                       |  | Nine Months Ended September 30,
|---------------------- |  | -------------------------------
|(amounts in millions)  |  | 2003                           
|Interest paid          |  | $                              
|Income taxes paid, net |  | $                              



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NOTE 11. LITIGATION AND RELATED MATTERS



ASBESTOS-RELATED LITIGATION



The following is a summary update of asbestos-related litigation; see Item 3 of
Armstrongs 2002 Form 10-K filing for additional information.



AWI, the
major operating subsidiary of AHI, is a defendant in personal injury cases and property damage cases related to asbestos containing products. On December 6, 2000, AWI filed a voluntary petition for relief (the Filing) under Chapter 11 of
the U.S. Bankruptcy Code to use the court supervised reorganization process to achieve a resolution of the AWI asbestos liability.



AHI, and Armstrongs other subsidiaries, including Triangle Pacific Corp. (now Armstrong Wood Products Inc.), WAVE (Armstrongs ceiling grid systems joint
venture with Worthington Industries), Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating subsidiaries were not a part of the Filing. Asbestos-related claims against any of these non-debtor entities are not addressed in the Chapter
11 proceedings unless they are personal injury derivative liabilities of AWI.



Asbestos-Related Personal Injury Claims



Prior to filing for relief under the Bankruptcy Code, AWI was a member of the Center for Claims Resolution (the Center) which handled the defense and settlement of asbestos-related personal injury claims on behalf of its
members. The Center pursued broad-based settlements of asbestos-related personal injury claims under the Strategic Settlement Program (SSP) and had reached agreements with law firms that covered approximately 130,000 claims that named
AWI as a defendant.



Due to the Filing, holders of asbestos-related personal
injury claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments to the Center with respect to asbestos-related personal injury claims, including payments
pursuant to the outstanding SSP agreements. AWIs obligations with respect to payments called for under these settlements will be determined in its Chapter 11 Case.



A creditors committee representing the interests of asbestos personal injury claimants and an individual representing the interests of
future personal injury claimants have been appointed in the Chapter 11 Case. AWIs present and future asbestos liability will be addressed in its Chapter 11 Case rather than through the Center and a multitude of lawsuits in different
jurisdictions throughout the U.S. It is anticipated that all of AWIs current and future asbestos-related personal injury claims will be resolved in the Chapter 11 Case.



Asbestos-Related Personal Injury Liability



In March 2003, AWI filed an amended Plan of Reorganization and disclosure statement and in
May 2003, AWI filed a further amended Plan of Reorganization (POR). The POR represents the product of negotiations with and is supported by the Asbestos Personal Injury Claimants Committee, the Unsecured Creditors Committee
and the Future Claimants Representative. Based upon the events that occurred through early March 2003, management concluded that it could reasonably estimate its probable liability for AWIs current and future asbestos-related personal
injury claims. Accordingly, in the fourth quarter of 2002, AWI recorded a $2.5 billion charge to increase the liability. The recorded asbestos-related liability for personal injury claims of approximately $3.2 billion at September 30, 2003 and
December 31, 2002, which was treated as subject to compromise, represents the estimated amount of liability that is implied based upon the negotiated resolution reflected in the POR, the total consideration expected to be paid to the Asbestos PI
Trust pursuant to the POR and a recovery value percentage for the allowed claims of the Asbestos PI Trust that is equal to the estimated recovery value percentage for the allowed non-asbestos unsecured claims. Pursuant to the POR, all AWI current
and future asbestos-related personal injury claims against AWI and other protected parties, as defined by the POR, will be channeled to the Asbestos PI Trust for resolution and, upon emergence from Chapter 11, reorganized AWI will not have any
responsibility for the claims or participate in their resolution. Claims against non-debtor companies, including Armstrong domestic and foreign subsidiaries, will not be channeled to the Asbestos PI Trust unless they are derivative liabilities of
AWI. For a complete description of the protection from asbestos claims, please read the POR.



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It is anticipated that the Court will hold a hearing to consider confirmation of the POR on November 17 and 18, 2003.
However, AWI is unable to predict when and if this POR will be confirmed. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded liability are
possible and could be material to AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and make changes to the recorded
liability if and when it is appropriate.



The $2.5 billion, fourth quarter
2002, charge to increase the asbestos-related personal injury liability was before recognition of gains from the settlement of liabilities subject to compromise, which will arise at a later date as a consequence of the Chapter 11 process.



Collateral Requirements



During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos-related personal injury claims asserted against AWI. On October 27, 2000, the insurance company that underwrote the surety bond informed AWI and the Center of its intention not to renew
the surety bond effective February 28, 2001. On February 6, 2001, the Center advised the surety of the Centers demand for payment of the face value of the bond. The surety filed a motion with the Court seeking to restrain the Center from
drawing on the bond. The motion was not granted. On March 28, 2001, the surety filed an amended complaint in the Court seeking similar relief. In addition, on April 27, 2001, AWI filed a complaint and a motion with the Court seeking an order, among
other things, enjoining the Center from drawing on the bond or, in the event the Center is permitted to draw on the bond, requiring that the proceeds of any such draw be deposited into a Court-approved account subject to further order of the Court.
Judge Alfred M. Wolin of the Federal District Court for the District of New Jersey (the District Court), who is also presiding over AWIs Chapter 11 Case, indicated he would determine these matters. In the spring of 2002, the surety
and the Center agreed to voluntarily dismiss the suretys complaint against the Center in light of AWIs filing of its complaint. The parties filed cross-motions for summary judgment with respect to the issue of whether the Center is
entitled to draw on the surety bond. On March 28, 2003, the District Court granted in part the Centers motion for summary judgment, and rejected certain defenses to the Centers attempt to draw on the surety bond. The District Court
further ruled that the surety bond did not cover settlements with asbestos claimants that were not documented as of the Filing. On April 7, 2003, the Center filed a motion to vacate that portion of the District Courts opinion that ruled that
the surety bond does not cover any settlement not documented as of the Filing. On July 9, 2003, the District Court granted AWIs motion for summary judgment in favor of AWI, dismissing the Centers claims against AWI on the basis that the
surety bond is unenforceable. During October 2003, AWI, the Asbestos Personal Injury Claimants Committee and the Unsecured Creditors Committee reached an agreement to settle claims from the Center and the surety bond insurance company.
As a result, AWI recorded $8.0 million in the third quarter of 2003 as a charge for asbestos liability, net.



Asbestos-Related Property Damage Litigation



Over the years, AWI was one of many defendants in asbestos-related property damage claims that were filed by public and private building
owners, with six claims pending as of June 30, 2001. The claims that were resolved prior to the Filing resulted in aggregate indemnity obligations of less than $10 million, which were entirely covered by insurance



The commencement of any new asbestos property damage actions are stayed due to the Filing. A
separate creditors committee representing the interests of property damage asbestos claimants was appointed in the Chapter 11 Case. Approximately 600 proofs of claim were filed with the Court in response to the March 1, 2002 bar date for
asbestos-related property damage claims. See Note 3 for further discussion. As part of determining whether AWI asbestos containing resilient floor covering products give rise to property damage liability, the Court conducted an initial hearing on
September 26  27, 2002 to decide the type of scientific testing allowable under the Federal Rules of Evidence to prove or



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disprove whether such products cause building contamination. On October 22, 2002, the Court granted AWIs requested relief and ruled that the
methodology offered by the Asbestos Property Damage Committee in support of its claims is not a scientifically valid method of quantifying the level of asbestos contamination in a building. On November 1, 2002, the Court directed that all property
damage claimants provide, in support of their claims, substantiation that Armstrong flooring products were used in the claimants buildings. The Courts deadline for submission of such product identification documentation was February 10,
2003. During the first six months of 2003, AWI settled all of the approximately 460 remaining property damage claims that alleged damages of $800 million, for approximately $9 million. Payments to claimants were made during the third quarter of 2003
and were funded by insurance. Based on the settlement of all remaining asbestos-related property damage claims, the Asbestos Property Damage Committee has been disbanded.



Insurance Recovery Proceedings



A substantial portion of AWIs primary and excess remaining insurance asset is nonproducts (general liability) insurance for personal
injury claims, including among others, those that involve alleged exposure during AWIs installation of asbestos insulation materials. AWI has entered into settlements with a number of the carriers resolving its coverage issues. However, an
alternative dispute resolution (ADR) procedure was commenced against certain carriers to determine the percentage of resolved and unresolved claims that are nonproducts claims, to establish the entitlement to such coverage and to
determine whether and how much reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is substantial and includes defense costs in addition to limits.



During 1999, AWI received preliminary decisions in the initial phases of the trial proceeding
of the ADR, which were generally favorable to AWI on a number of issues related to insurance coverage. However, during the first quarter of 2001, a new trial judge was selected for the ADR. The new trial judge conducted hearings in 2001 and
determined not to rehear matters decided by the previous judge. In the first quarter of 2002, the new trial judge concluded the ADR trial proceeding with findings in favor of AWI on substantially all key issues. Liberty Mutual, the only insurer that
is still a party to the ADR, appealed that final judgment. Appellate argument was held on March 11, 2003. On July 30, 2003, the appellate arbitrators ruled that AWIs claims against certain Liberty Mutual policies were barred by the statute of
limitations. The ruling did not address the merits of any of the other issues Liberty Mutual raised in its appeal. Based on that unfavorable ruling, AWI concluded that $73 million of previously recorded insurance assets were no longer probable of
recovery. AWI was also ordered to reimburse Liberty Mutual for certain costs and administration fees that Liberty Mutual incurred during the ADR. The amount of these costs and fees are unknown and AWI is currently unable to estimate the amount.
Based upon an AWI request, the appellate panel has scheduled a rehearing for November 21, 2003.



In July 2002, AWI filed a lawsuit against Liberty Mutual in the Federal District Court for the Eastern District of Pennsylvania seeking, among other things, a declaratory judgment with respect to certain policy issues
not subject to binding ADR. The Federal District Court has not yet set a schedule to hear this matter.



One of the insurance carriers, Reliance Insurance Company, was placed under an order of liquidation by the Pennsylvania Insurance Department during October 2001 due to financial difficulties. The order of liquidation
prohibits Reliance from making any claim payments under the insurance policies until the liquidation occurs. AWI filed a proof of claim against Reliance during July 2003. It is uncertain when AWI will receive proceeds from Reliance under these
insurance policies.



Another insurer, Century Indemnity Company, who previously
settled its coverage issues with AWI, has made some of its required payments under the settlement to a trust of which AWI is a beneficiary. During January 2002, this insurer filed an adversary action in AWIs Chapter 11 Case. Among other
things, the action requests the Court to (1) declare that the settlement agreement is an executory contract and to compel assumption or rejection of the agreement; (2) declare that the insurer need not make its present and future scheduled payments
unless AWI assumes the agreement; (3) declare that the insurer is entitled to indemnification from AWI against any liabilities that the insurer may incur in certain unrelated litigation in which the insurer is involved; and (4) enjoin the
disposition of funds previously paid by the insurer to the trust pending an adjudication of the insurers rights. On October 7, 2003, the Court ruled that Century must pay the past due amounts plus interest. Century has appealed the
Courts ruling.



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On June 13, 2003, the New Hampshire Insurance Department placed The Home Insurance Company (Home) under an
order of liquidation. Less than $10 million of AWIs recorded insurance asset is based on policies with Home, which management believes is still probable of recovery. AWI intends to file a proof of claim against Home by the June 2004 deadline.
It is uncertain when AWI will receive proceeds from Home under these insurance policies.



Insurance Asset



An insurance asset in respect of asbestos claims in the amount of $111.1 million is recorded as of September 30, 2003 compared to $198.1 million recorded at December 31,
2002. During the second quarter of 2003, AWI reduced its previously recorded insurance asset for asbestos-related personal injury claims by $73 million reflecting managements current assessment of probable insurance recoveries in light of the
ADR appellate panel decision. The $73 million was recorded as a charge for asbestos liability, net, in the accompanying condensed consolidated statement of earnings. Also during the second quarter of 2003, the insurance asset was lowered by $14
million for asbestos-related personal injury insurance recoveries. Further, the insurance asset was increased by $9 million to reflect agreements reached during the first half of 2003 for asbestos property damage claims. During the third quarter of
2003, AWI received $9.0 million of insurance proceeds related to the asbestos property damage claims.



Approximately $22.0 million of the total $111.1 million recorded insurance asset at September 30, 2003 represents partial settlement for previous claims that will be paid in a fixed and determinable flow and is
reported at its net present value discounted at 6.50%. The total amount recorded reflects AWIs belief that insurance proceeds will be recovered in this amount, based upon AWIs success in insurance recoveries, settlement agreements that
provide such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. Such insurance is either available through settlement or probable of recovery through negotiation or litigation. Depending on further progress
of the ADR, activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, the final determination of coverage shared with ACandS (the former AWI insulation contracting subsidiary that was sold in
August 1969 and which filed for relief under Chapter 11 of the Bankruptcy Code in September 2002) and the financial condition of the insurers, AWI may revise its estimate of probable insurance recoveries. Approximately $79 million of the $111.1
million asset is determined from agreed coverage in place. Of the $111.1 million, $16.0 million has been recorded as a current asset as of September 30, 2003 reflecting managements estimate of the minimum insurance payments to be received in
the next 12 months. As of October 2003, approximately $8.0 million of the $16.0 million current asset is past due. AWI believes collection of the full amount is still probable and therefore has not established a reserve against these receivables.



AWI believes that the process of pursuing disputed insurance coverage may
result in additional settlement amounts than already recorded. However, many uncertainties remain in this process, therefore, AWI did not increase the estimated insurance recovery asset in the fourth quarter of 2002, when it revised its recorded
asbestos liability for personal injury claims by $2.5 billion.



Cash Flow Impact



As a result of the
Chapter 11 Filing, AWI did not make any payments for asbestos-related personal injury claims in the first nine months of 2003 or 2002. During the first nine months of 2003 and 2002, AWI received asbestos-related personal injury insurance recoveries
of $14.0 million and $16.0 million, respectively. During the third quarter of 2003, AWI paid $9.0 million for asbestos-related property damage claims and received $9.0 million of insurance proceeds related to these claims. During the pendency of the
Chapter 11 Case, AWI does not expect to make any further cash payments for asbestos-related claims, but AWI expects to continue to receive insurance proceeds under the terms of various settlement agreements. Management estimates that the timing of
future cash recoveries of the recorded asset may extend beyond 10 years.



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Potential Legislation



The media has been reporting that progress is being made among some industry groups,
insurers, labor unions and members of the United States Congress, on agreeing to comprehensive legislation to resolve asbestos litigation issues through a proposed national privately funded trust. While the United States Senate Judiciary Committee
reached an agreement on a proposed bill in July 2003, negotiations continue on a final bill to submit for consideration by the full Senate. There is uncertainty as to whether this or any other proposal will become law, and what impact, if any, there
might be on AWIs asbestos liability and/or AWIs Chapter 11 Case. Prior efforts to enact asbestos legislation have not been successful.



Conclusion



Many uncertainties continue to exist about the matters impacting AWIs asbestos-related liability and insurance asset. These uncertainties include the impact of the
Filing and the Chapter 11 process, the number of future claims to be filed, the ultimate value of the asbestos liability, the impact of any potential legislation, the impact of the ADR proceedings on the insurance asset and the financial condition
of AWIs insurance carriers. During 2003, AWI has not revised its previously recorded liability for asbestos-related personal injury claims. However, during the second quarter of 2003, AWI reduced its previously recorded insurance asset for
asbestos-related personal injury claims by $73 million reflecting managements current assessment of probable insurance recoveries based on the unfavorable ruling by the ADR appellate panel.



Additionally, although a POR and Disclosure Statement have been filed with the Court and
submitted for voting by creditors, implementation of the POR is subject to the creditors vote and confirmation of the POR in accordance with the provisions of the Bankruptcy Code. AWI is unable to predict when and if the POR will be confirmed.
Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded liability and insurance asset are possible and could be material to AWIs financial
position and the results of its operations. Management will continue to review the recorded liability and insurance asset in light of future developments in the Chapter 11 Case and make changes to the recorded amounts if and when it is appropriate.



NON-CHAPTER 11 ASBESTOS-RELATED
LITIGATION



Historically, Armstrong non-debtor companies, including
Armstrong domestic and foreign subsidiaries, have been involved in defending and resolving some third party and other asbestos-related claims. Currently, an Armstrong domestic non-debtor subsidiary is a defendant in two third party asbestos-related
litigation matters pending in California state court. It is asserted that the plaintiffs were exposed to asbestos for many years in various occupations, including while aboard various ships in the 1940s , and as a result contracted various
asbestos-related diseases. It is alleged that the Armstrong subsidiary is a successor in interest to a company that, at certain times, allegedly owned some of these vessels. The cases have multiple defendants. Another case that was
scheduled for trial in November 2003 has been dismissed. Armstrong denies liability and is aggressively defending the matters. Armstrong has not recorded any liability for these matters. Management does not expect that any sum that may have to be
paid in connection with these two matters will have a material adverse effect on its consolidated results of operations or liquidity.



ENVIRONMENTAL LIABILITIES



Most of Armstrongs manufacturing and certain of Armstrongs research facilities are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment. Armstrong has made, and intends to continue to make, necessary expenditures for compliance with applicable environmental requirements at its operating facilities. Armstrong
anticipates that annual expenditures for those purposes will not change materially from recent experience. However, applicable environmental laws continue to change. As a result of continuous changes in regulatory requirements, Armstrong cannot
predict with certainty future capital expenditures associated with compliance with environmental requirements.



Armstrong is involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund), and similar state laws at approximately 24 sites. In most cases, Armstrong



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is one of many potentially responsible parties (PRPs) which have potential liability for the required investigation and remediation of each site
and which, in some cases, have agreed to jointly fund that required investigation and remediation. With regard to some sites, however, Armstrong disputes the liability, the proposed remedy or the proposed cost allocation among the PRPs. Armstrong
may have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.



Armstrong has also been remediating environmental contamination resulting from past industrial activity at certain of its former plant sites. Estimates of
Armstrongs future environmental liability at the Superfund sites and current or former plant sites are based on evaluations of currently available facts regarding each individual site and consider factors such as Armstrongs activities in
conjunction with the site, existing technology, presently enacted laws and regulations and prior company experience in remediating contaminated sites. Although current law imposes joint and several liability on all parties at Superfund sites,
Armstrongs contribution to the remediation of these sites is expected to be limited by the number of other companies also identified as potentially liable for site remediation. As a result, Armstrongs estimated liability reflects only
Armstrongs expected share. In determining the probability of contribution, Armstrong considers the solvency of the parties, whether liability is being disputed, the terms of any existing agreements and experience with similar matters. The
Chapter 11 Case also may affect the ultimate amount of such contributions.



AWIs payments and remediation work on such sites for which AWI is the potentially responsible party is under review in light of the Chapter 11 Filing. The bar date for claims from several environmental agencies expired during the
third quarter of 2003. AWI received an unliquidated proof of claim from the United States Environmental Protection Agency (EPA).



In July 2003, the EPA notified Armstrong, as a PRP at a particular Superfund site, of the EPAs estimate of the sites future cleanup costs, with its assessment
of AWIs share of the costs being a range of $17.8 million to $26.2 million. AWI is currently reviewing this matter but disputes the assessment.



Management is currently in discussions with the EPA to resolve the unliquidated proof of claim against AWI. Upon further analysis of the sites being discussed, management
estimated that AWIs probable share of the sites future cleanup costs is $3.1 million. AWI recorded a charge of $2.4 million within selling, general and administrative expense in the third quarter of 2003 to increase its liability to this
new estimate.



AWI is subject to a unilateral order by the Oregon Department of
Environmental Quality (DEQ) to conduct a remedial investigation and feasibility study and any necessary remedial design and action at its St. Helens, Oregon facility, as well as the adjacent Scappoose Bay. AWI has denied liability for
the Scappoose Bay, but has cooperated with the DEQ regarding its owned property. Other potentially responsible parties who are not yet subject to orders by the DEQ include former site owners Owens Corning (OC) and Kaiser Gypsum Company,
Inc. (Kaiser). AWI has entered into an agreement with Kaiser for the sharing of costs and responsibilities with respect to the remedial investigation, feasibility study and remedy selection at the site. OC has entered into a settlement
with the DEQ. Pursuant to the settlement, OC will make a lump sum payment to the DEQ in exchange for contribution protection (including protection against common law and statutory contribution claims by AWI against OC) and a covenant not to sue. AWI
has negotiated with the DEQ how these funds will be made available for the investigation and remedial action for the site. AWI has recorded an environmental liability with respect to the St. Helens remedial investigations and feasibility study at
its facility, but not for Scappoose Bay because AWI continues to dispute responsibility for any contamination in Scappoose Bay.



Liabilities of $23.6 million at September 30, 2003 and $21.2 million at December 31, 2002 were for potential environmental liabilities that Armstrong considers probable
and for which a reasonable estimate of the probable liability could be made. Where existing data is sufficient to estimate the liability, that estimate has been used; where only a range of probable liability is available and no amount within that
range is more likely than any other, the lower end of the range has been used. As assessments and remediation activities progress at each site, these liabilities are reviewed to reflect additional information as it becomes available. Due to the
Chapter 11 Filing, $12.8 million of the September 30, 2003 and $11.4



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million of the December 31, 2002 environmental liabilities are classified as prepetition liabilities subject to compromise. As a general rule, the Chapter 11
process does not preserve company assets for such prepetition liabilities.



The
estimated liabilities above do not take into account any claims for recoveries from insurance or third parties. Such recoveries, where probable, have been recorded as an asset in the consolidated financial statements and are either available through
settlement or anticipated to be recovered through negotiation or litigation. The amount of the recorded asset for estimated recoveries was $2.5 million and $3.3 million at September 30, 2003 and December 31, 2002, respectively.



Actual costs to be incurred at identified sites may vary from the estimates, given the
inherent uncertainties in evaluating environmental liabilities. Subject to the imprecision in estimating environmental remediation costs, Armstrong believes that any sum it may have to pay in connection with environmental matters in excess of the
amounts noted above would not have a material adverse effect on its financial condition, or liquidity, although the recording of future costs may be material to earnings in such future period.



PATENT INFRINGEMENT CLAIMS



Armstrong is a defendant in three related lawsuits claiming patent infringement related to
some of Armstrongs laminate products. The plaintiffs have claimed unspecified monetary damages. Armstrong is being defended and indemnified by its supplier for all costs and potential damages related to the litigation.



FORMER EMPLOYEES CLAIM



Former Armstrong employees that were separated from the company in two business divestitures
in 2000 brought two purported class actions against the Retirement Committee of AWI, certain current and former members of the Retirement Committee, the Retirement Savings and Stock Ownership Plan (RSSOP), AHI and the trustee bank of the RSSOP.
Plaintiffs alleged breach of Employee Retirement Income Security Act (ERISA) fiduciary duties and other violations of ERISA pertaining to losses in their RSSOP accounts, which were invested in Armstrong common stock.



An agreement was reached to settle this matter. Contributors to the settlement are AWI, its
insurer and the trustee bank of the RSSOP. The full amount of the settlement will be allocated among approximately 370 former employees. AWIs portion of the settlement is $1.0 million, which will be treated as convenience claims in the Chapter
11 Case. The settlement was approved by the Bankruptcy Court on March 31, 2003 and by the United States District Court (Eastern District of PA) on June 16, 2003. Based upon the Bankruptcy Courts approval of the settlement, AWI recorded a $1.0
million charge in the first quarter of 2003 as an other non-operating expense.



DEPARTMENT OF LABOR DISCUSSIONS



Subsequent to an audit by the United States Department of Labor (DOL), Armstrong was informed that the DOL was challenging the validity of the use of certain
contributions, in the approximate aggregate amount of $33.4 million, to fund debt payments made by the Armstrong Employee Stock Ownership Plan (ESOP), as provided for by that plan. Armstrong and the DOL reached a settlement to resolve
this matter with a funding to the ESOP of $1.5 million, which will be distributed to plan participants in accordance with terms of the agreement. Insurance and third parties will fund $0.9 million of the settlement. In the third quarter of 2003,
Armstrong recorded a liability of $1.5 million and a receivable of $0.9 million as a selling, general and administrative expense to represent Armstrongs $0.6 million funding of the settlement, which will be paid in the fourth quarter of 2003.



OTHER CLAIMS



Additionally, Armstrong is involved in various other claims and legal actions involving
product liability, patent infringement, distributor termination, employment law issues and other actions arising in the ordinary course of business. While complete assurance cannot be given to the outcome of these claims, Armstrong does not expect
that any sum that may have to be paid in connection with these matters will have a materially adverse effect on its consolidated financial position or liquidity, however it could be material to the results of operations in the particular period in
which a matter is resolved.



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NOTE 12. SUBSEQUENT EVENT



In October 2003, Armstrong announced its plans to close a Wood Flooring manufacturing
location in Warren, Arkansas, effective December 2003, due to excess production capacity. Approximately 130 employees work at the plant. It is expected that charges of approximately $8 million will be recorded during the fourth quarter of 2003 to
cover accelerated depreciation and severance.



NOTE 13. DIFFERENCES BETWEEN ARMSTRONG HOLDINGS, INC. AND ARMSTRONG WORLD INDUSTRIES, INC.



The difference between the condensed consolidated financial statements is primarily due to stock activity and intercompany transactions.



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion and analysis corresponds to AHI financial statements. Since there are no material differences between the financial statements of AHI and
Armstrong, the following discussion and analysis pertains to both AHI and Armstrong.



Proceedings under Chapter 11



On December 6, 2000, AWI,
the major operating subsidiary of AHI, filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S. Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware
(the Court) in order to use the court-supervised reorganization process to achieve a resolution of the AWI asbestos liability. Also filing under Chapter 11 were two of Armstrongs wholly-owned subsidiaries, Nitram Liquidators, Inc.
(Nitram) and Desseaux Corporation of North America, Inc. (Desseaux, and together with AWI and Nitram, the Debtors). The Chapter 11 cases are being jointly administered under case numbers 00-4469, 00-4470, and
00-4471 (the Chapter 11 Case).



AHI, and Armstrongs other
subsidiaries, including Triangle Pacific Corp. (now Armstrong Wood Products Inc.), WAVE (Armstrongs ceiling grid systems joint venture with Worthington Industries), Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating
subsidiaries were not a part of the Filing. Asbestos-related claims against any of these non-debtor entities are not addressed in the Chapter 11 proceedings unless they are personal injury derivative liabilities of AWI.



AWI is operating its business and managing its properties as a debtor-in-possession subject
to the provisions of the Bankruptcy Code. Pursuant to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date (prepetition claims) unless specifically authorized by the Court.
Similarly, claimants may not enforce any claims against AWI that arose prior to the date of the Filing unless specifically authorized by the Court. In addition, as a debtor-in-possession, AWI has the right, subject to the Courts approval, to
assume or reject any executory contracts and unexpired leases in existence at the date of the Filing. Parties having claims as a result of any such rejection may file claims with the Court, which will be dealt with as part of the Chapter 11 Case.



Three creditors committees, one representing asbestos personal injury
claimants (the Asbestos Personal Injury Claimants Committee), one representing asbestos property damage claimants (the Asbestos Property Damage Committee), and the other representing other unsecured creditors (the
Unsecured Creditors Committee), were appointed in the Chapter 11 Case. Based on the settlement of all remaining asbestos-related property damage claims as described below, the Asbestos Property Damage Committee has been disbanded.
In addition, an individual has been appointed to represent the interests of future asbestos personal injury claimants (the Future Claimants Representative). In accordance with the provisions of the Bankruptcy Code, these parties
have the right to be heard on matters that come before the Court in the Chapter 11 Case.



Plan of Reorganization



On November 4, 2002, AWI filed a Plan of Reorganization with the Court. AWI has since filed several amended plans of reorganization with the Court, along with selected
exhibits. The fourth amended Plan of Reorganization, with certain exhibits, was filed on May 23, 2003 (as so amended, it is referred to in this report as the POR). The POR has been endorsed by AHIs Board of Directors and is
supported by the Asbestos Personal Injury Claimants Committee, the Unsecured Creditors Committee and the Future Claimants Representative. The POR provides for AWI to continue to conduct its existing lines of business with a
reorganized capital structure, under which, among other things, its existing shares will be cancelled and new common shares and notes will be issued to its unsecured creditors and to a trust to be established under the POR for the benefit of
AWIs current and future asbestos personal injury claimants, in full satisfaction of their claims against AWI, as further discussed below. The POR excludes Armstrongs Nitram and Desseaux subsidiaries.



The POR was mailed to creditors for voting in June 2003. The Court extended the deadline for
creditors to vote on the POR from September 22, 2003 to October 31, 2003. The Court received 17 objections to



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the POR from creditors by the September 22, 2003 deadline. AWI has resolved or filed responses to these objections and believes that many of these objections
will be addressed prior to the Confirmation hearing. Technical modifications to the fourth amended Plan of Reorganization were filed on October 17, 2003.



Implementation of the POR and the treatment of claims and interests as provided therein are subject to confirmation of the POR in accordance with the provisions of the
Bankruptcy Code. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. See Next Steps in the Chapter 11 Process section for further discussion.



Disclosure Statement



On December 20, 2002, a proposed disclosure statement with respect to the POR was filed with
the Court. On December 26, 2002, AWI filed projected financial information with the Court as an exhibit to the disclosure statement (therein known as Exhibit C). Following various amendments, on May 30, 2003, the Court approved the
Disclosure Statement (as so amended, it is referred to in this report as the Disclosure Statement) and it was distributed by AWI with the POR for creditor voting on the POR in June 2003.



As indicated in the Disclosure Statement and its exhibits, the projected financial
information and various estimates of value therein discussed (as previously submitted or as to be revised) should not be regarded as representations or warranties by AWI, AHI or any other person as to the accuracy of such information or that any
such projection or valuation will be realized. The information in the Disclosure Statement, including the projected financial information and estimates of value, was prepared by AWI and its financial advisors. This information has not been audited
or reviewed by independent accountants. The Disclosure Statement discusses the significant assumptions used in preparation of the projected financial information and estimates of value.



The discussions of the POR and Disclosure Statement in this report are qualified by reference to the full text of those documents as filed
with the Court and filed for reference purposes with the Securities and Exchange Commission. The POR and Disclosure Statement are available at www.armstrongplan.com, where additional information will be posted as it becomes available.



Asbestos Personal Injury Trust



A principal feature of the POR is the creation of a trust (the Asbestos
PI Trust), pursuant to section 524(g) of the Bankruptcy Code, to which all AWI present and future asbestos-related personal injury claims, including contribution claims of co-defendants, will be channeled. In accordance with the 524(g)
injunction to be issued by the Court in connection with the confirmation of the POR, various entities will be protected from suit on account of AWI present and future asbestos-related personal injury claims. These entities include, among
others, AWI, reorganized AWI, AHI, AWIs affiliates, and their respective officers and directors. Claims resolution procedures to be utilized by the Asbestos PI Trust have been developed. These procedures will govern the allowance and payment
by the Asbestos PI Trust of these AWI present and future asbestos-related personal injury claims. The Asbestos PI Trust will be funded with AWIs rights to insurance providing coverage for asbestos-related personal injury claims, as well as a
share of cash, notes, and common stock to be issued under the POR to creditors, as described below.



Consideration to Be Distributed under the POR



The Asbestos PI Trust and the holders of unsecured claims will share in the POR consideration that is made up of the following components:



| |  | Available Cash, which is comprised of:
| | - | --------------------------------------



| |  |  | Cash available on the effective date of the POR after reserving up to $100 million to fund ongoing operations and making provisions for certain required payments under the POR,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Any cash drawn, at AWIs sole discretion, under an exit finance facility for the purpose of funding distributions under the POR, and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Certain insurance proceeds related to environmental matters
| | - |  | -----------------------------------------------------------



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However, proceeds received under any private offering of debt securities and/or secured term loan
borrowings, shall be excluded from the determination of Available Cash.



| |  | Plan Notes of reorganized AWI and/or net proceeds from any private offerings of debt securities, and
| | - | ----------------------------------------------------------------------------------------------------



| |  | Substantially all of the new common stock of reorganized AWI
| | - | ------------------------------------------------------------



The total amount of Plan Notes will be the greater of (i) $1.125 billion less Available Cash and (ii) $775 million. However, AWI will use reasonable efforts to issue one
or more private offerings of debt securities on, or as soon as practicable after, the Effective Date that would yield net proceeds at least equal to the amount of the Plan Notes prescribed by the Plan. If the private offerings are successful, the
Plan Notes would not be issued. If the offerings yield proceeds less than the amount of the Plan Notes prescribed by the Plan, AWI will issue Plan Notes equal to the difference. The private offerings, if issued, will not be registered under the
Securities Act of 1933 and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements.

If only
the Plan Notes are issued, AWI expects to issue an aggregate amount of $775 million Plan Notes. These Plan Notes will consist of (i) a tranche of notes with a seven-year maturity and a fixed interest rate, (ii) a tranche of notes with a ten-year
maturity and a fixed interest rate and (iii) a tranche of floating rate notes with a maturity of not less than five years, but no more than ten years, structured in a manner similar to, and as liquid as, marketable bank debt which satisfy the
requirements of the POR and are on terms and conditions that are mutually satisfactory to AWI and the Asbestos PI Claimants Committee, the Future Claimants Representative, and, if unsecured claimants, other than convenience claimants,
vote to accept the POR, the Unsecured Creditors Committee.



The POR
provides that unsecured creditors, other than convenience creditors described below, will receive their pro rata share of:



| |  | 34.43% of the new common stock of reorganized AWI,
| | - | --------------------------------------------------



| |  | 34.43% of the first $1.05 billion of
| | - | ------------------------------------



| |  |  | Up to $300 million of Available Cash and
| | - |  | ----------------------------------------



| |  |  | The principal amount of each series of Plan Notes and/or net cash proceeds from any private debt offerings of debt securities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  | 60% of the next $50 million of Available Cash and, if such Available Cash is less than $50 million, then 60% of each series of Plan Notes and/or net cash proceeds from any private
debt offerings of debt securities, in an amount equal to the difference between $50 million and the amount of such Available Cash, and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 34.43% of the remaining amount of Available Cash and each series of Plan Notes and/or net cash proceeds from any private debt offerings of debt securities.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------



The remaining amount of new common stock of reorganized AWI, Available Cash and Plan Notes
and/or net cash proceeds from any private debt offerings of debt securities will be distributed to the Asbestos PI Trust.



Under the POR, unsecured creditors whose claims (other than debt securities) are less than $10,000 or who elect to reduce their claims to $10,000 will be treated as
convenience creditors and will receive payment of 75% of their allowed claim amount in cash.



Under the POR, the existing equity interests in AWI will be cancelled. The POR provides for the distribution, with respect to existing equity, of warrants to purchase shares of reorganized AWI (the
Warrants). The terms of the Warrants are provided in an exhibit to the POR. The Warrants:



| |  | Would constitute 5% of the common stock of reorganized AWI on a fully diluted basis, upon exercise of all the Warrants;
| | - | -----------------------------------------------------------------------------------------------------------------------



| |  | Would have a scheduled 7-year exercisable term from the effective date of the POR; and
| | - | --------------------------------------------------------------------------------------



| |  | Would contain an exercise price equal to 125% of the per share equity value of reorganized AWI, as agreed among the financial advisers for AWI, the Asbestos Personal Injury
Claimants Committee, the Unsecured Creditors Committee, and the Future Claimants Representative, as set forth in the Court-approved disclosure statement for the POR.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Warrants are estimated to have a value on the effective date of the POR of approximately
$35 million to $40 million. Whether any value will be realized from the Warrants will depend on circumstances after they are issued, particularly whether the market value of the reorganized AWIs new common stock reaches a value in excess of
the exercise price of the Warrants during the period that they may be exercised.



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AHIs shareholders are not entitled to vote on the POR. However, AHIs shareholders have been sent a copy of
the Disclosure Statement. If the POR is implemented, the only value that will be available to AHI shareholders is their ratable share of the Warrants. AHI intends to distribute the Warrants to its shareholders if AHIs Plan of Dissolution (see
discussion below) is approved by AHIs shareholders.



Valuation of Reorganized AWI for Purposes of the POR



In the Disclosure Statement, which assumed an Effective Date of the POR of July 1, 2003, and based on estimates of the fair value of reorganized AWI, the total value of consideration to be distributed to the Asbestos
PI Trust, other than the asbestos product liability insurance policies, will be approximately $1.8 billion, and the total value of consideration to be distributed to holders of allowed unsecured claims (other than convenience claims) will be
approximately $0.9 billion. Based upon the estimated value of the POR consideration and AWIs estimate that unsecured claims allowed by the Court (other than convenience claims) will total approximately $1.65 billion, AWI estimates that holders
of allowed unsecured claims (other than convenience claims) will receive a recovery having a value equal to approximately 59.5% of their allowed claims. AWIs estimates of the consideration and potential recoveries are based upon many
assumptions, including:



| |  | The estimated reorganization value for AWI is between $2.4 billion and $3.0 billion (with a midpoint of $2.7 billion);
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | The estimated equity value of new common stock is between $24.66 and $35.30 per share with a midpoint of $30.00 per share (assuming a distribution of 56.4 million shares of new
common stock to holders of unsecured claims and the Asbestos PI Trust);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Plan Notes will be in the aggregate principal amount of $775 million and are worth their face value
| | - | -------------------------------------------------------------------------------------------------------



| |  | AWI expects to have Available Cash of approximately $350 million; and
| | - | ---------------------------------------------------------------------



| |  | The estimated value of the Warrants is between $35 million and $40 million
| | - | --------------------------------------------------------------------------



The estimated reorganization value was reduced from previously reported amounts based on revised projected financial information that incorporated updated economic
conditions.



AHIs Plan of
Dissolution, Winding Up and Distribution (Plan of Dissolution)



In connection with the consummation of the POR, the existing equity interests in AWI will be cancelled, the new common stock of reorganized AWI will be issued to AWIs unsecured creditors and the Asbestos PI Trust and the Warrants will
be issued to AHI (or a wholly-owned subsidiary of AHI). The Board of Directors of AHI has determined that it is not practicable for AHI to continue in operation as an on-going business owning the Warrants, which will then be AHIs only asset.
The POR contemplates, and the Board of Directors of AHI has approved and recommended, that AHI shareholders voluntarily dissolve AHI and adopt a plan for winding up its affairs in accordance with Pennsylvania law and, subject to completion of
AHIs winding up, distributing the Warrants to the shareholders. A special meeting of AHI shareholders has been called to vote on the Plan of Liquidation on December 3, 2003, and appropriate materials regarding such meeting have been sent to
AHIs shareholders. If the Plan of Dissolution is not approved by AHIs shareholders, AHI will not distribute the Warrants to AHIs shareholders and the Board of Directors will determine how to proceed under the circumstances. One
alternative in such event may be for AHI to seek involuntary dissolution by order of, and under the supervision of, a Pennsylvania court. The POR provides that reorganized AWI will pay costs and expenses incurred in connection with seeking AHI
shareholder approval of the Plan of Dissolution and, if so approved, of administering AHIs Plan of Dissolution. Reorganized AWI will otherwise have no responsibility for AHIs on-going costs.



Other Matters



In another companys asbestos-related Chapter 11 case, a motion for recusal has been
filed against Judge Alfred M. Wolin, who is jointly administering the asbestos issues in five companies Chapter 11 cases, including AWI. Judge Wolin has not yet ruled on the recusal motion. AWI is uncertain as to the merits of the motion, and
what impact, if any, this motion will have on AWIs Chapter 11 proceedings.



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Next Steps in the Chapter 11 Process



Following the creditor voting, the Court will hold a hearing to consider confirmation of the
POR. It is anticipated that such hearing will be on November 17 and 18, 2003. If the Court confirms the POR in November, AWI could emerge from Chapter 11 protection as soon as the end of 2003. Of course, there can be no certainty that all such
events will occur, or if they do, that they will occur in accordance with such timeframes.



Common Stock and Debt Securities



As a result of AWI filing the Plan of Reorganization on November 4, 2002, the New York Stock Exchange stopped trading on the Exchange of the common stock of AHI (traded
under the ticker symbol ACK) and two debt securities of AWI (traded under the ticker symbols AKK and ACK 08). AHIs common stock has resumed trading in the over-the-counter (OTC) Bulletin Board under the
ticker symbol ACKHQ and one of AWIs debt securities has resumed trading under the ticker symbol AKKWQ.



Bar Date for Filing Claims



The Court established August 31, 2001 as the bar date for all claims against AWI except for asbestos-related personal injury claims and certain other specified claims. A
bar date is the date by which claims against AWI must be filed if the claimants wish to participate in any distribution in the Chapter 11 Case. The Court had extended the bar date for claims from several environmental agencies until the third
quarter of 2003. A bar date for asbestos-related personal injury claims (other than claims for contribution, indemnification, or subrogation) has been rendered unnecessary under the terms of the POR, which defers such filings until the establishment
of a trust to administer such claims.



Approximately 4,700 proofs of claim
(including late-filed claims) totaling approximately $6.3 billion alleging a right to payment from AWI were filed with the Court in response to the August 31, 2001 bar date, which are discussed below. AWI continues to investigate claims. The Court
will ultimately determine liability amounts that will be allowed as part of the Chapter 11 process.



In its ongoing review of the filed claims, AWI has identified and successfully objected to approximately 2,000 claims totaling $2.1 billion. These claims were primarily duplicate filings, claims that were subsequently
amended or claims that are not related to AWI. The Court disallowed these claims with prejudice.



Approximately 1,000 proofs of claim totaling approximately $1.8 billion are pending with the Court that are associated with asbestos-related personal injury litigation, including direct personal injury claims, claims
by co-defendants for contribution and indemnification, and claims relating to AWIs participation in the Center for Claims Resolution (the Center). As stated above, the bar date of August 31, 2001 did not apply to asbestos-related
personal injury claims other than claims for contribution, indemnification, or subrogation. The POR contemplates that all AWI asbestos-related personal injury claims, including claims for contribution, indemnification, or subrogation, will be
addressed in the future pursuant to the procedures to be developed in connection with the POR. See further discussion regarding AWIs liability for asbestos-related matters in Note 11.



During the first six months of 2003, AWI settled all of the approximately 460 remaining
property damage claims that alleged damages of $0.8 billion, for approximately $9 million. Payments to claimants were made during the third quarter of 2003 and were funded by insurance. See Note 10 for further discussion of property damage
litigation.



Approximately 1,200 claims totaling approximately $1.6 billion
alleging a right to payment for financing, environmental, trade debt and other claims are pending with the Court. For these categories of claims, AWI has previously recorded approximately $1.6 billion in liabilities. AWI continues to investigate the
claims to determine their validity.



AWI continues to evaluate claims filed in
the Chapter 11 Case. AWI has recorded liability amounts for claims whose value can be reasonably estimated and which it believes are probable of being allowed by the Court. During the fourth quarter of 2002, AWI recorded a $2.5 billion charge to
increase its estimate



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of probable asbestos-related liability for personal injury claims based on the developments in the Chapter 11 Case. See Note 11 for further discussion. At
this time, it is impossible to reasonably estimate the value of all the claims that will ultimately be allowed by the Court. However, it is likely the value of the claims ultimately allowed by the Court will be different than amounts presently
recorded by AWI and could be material to AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future developments in the Chapter 11 Case and make changes to the
recorded liability if and when it is appropriate.



Financing



On November 1, 2002, the Court announced it had
approved AWIs motion to reduce the amount of its debtor-in-possession credit facility (the DIP Facility) from $200 million to $75 million, eliminate the revolving credit borrowing feature, retain the letter of credit issuance
facility and extend the maturity date to December 8, 2003. On September 29, 2003, the Court approved the extension of the maturity date of the DIP Facility to December 8, 2004. As of September 30, 2003, AWI had approximately $32.6 million in letters
of credit which were issued pursuant to the DIP Facility. As of September 30, 2003, AWI had $263.2 million of cash and cash equivalents, excluding cash held by its non-debtor subsidiaries. AWI believes that cash on hand and generated from operations
and dividends from its subsidiaries, together with lines of credit and the DIP Facility, will be adequate to address its foreseeable liquidity needs. Obligations under the DIP Facility, including reimbursement of draws under the letters of credit,
if any, constitute superpriority administrative expense claims in the Chapter 11 Case.



Accounting Impact



AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7) provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code. This guidance is implemented in the accompanying consolidated financial statements.



Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that are subject to compromise and report them separately on the
balance sheet. See Note 5 for detail of the liabilities subject to compromise at September 30, 2003 and December 31, 2002. Liabilities that may be affected by a plan of reorganization are recorded at the expected amount of the allowed claims, even
if they may be settled for lesser amounts. Substantially all of AWIs prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of Armstrong subsidiaries not covered by
the Filing remain classified on the condensed consolidated balance sheet based upon maturity date. AWIs estimated liability for asbestos-related personal injury claims is also recorded in liabilities subject to compromise. See Note 11 for
further discussion of AWIs asbestos liability.



Additional prepetition
claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.



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SOP 90-7 also requires separate reporting of all revenues, expenses, realized gains and losses, and provision for losses
related to the Filing as Chapter 11 reorganization costs, net. Accordingly, AWI recorded the following Chapter 11 reorganization activities during the first nine months of 2003 and 2002:



|(amounts in millions)                             |  | 2003 |      |   | 2002 |  
|------------------------------------------------- |  | ---- | ---- | - | ---- | -
|Professional fees                                 |  | $    | 19.0 |   |      | $
|Interest income, post petition                    |  |      | (2.4 | ) |      |  
|Reductions to prepetition liabilities             |  |      | (0.5 | ) |      |  
|Other expense directly related to bankruptcy, net |  |      | 0.1  |   |      |  
|                                                  |  |      |      |   |      |  
|Total Chapter 11 reorganization costs, net        |  | $    | 16.2 |   |      | $
|                                                  |  |      |      |   |      |  



Professional fees represent legal and
financial advisory fees and expenses directly related to the Filing.



Interest
income is earned from short-term investments of cash subsequent to the Filing. Reductions to prepetition liabilities represent Court approved settlements of prepetition liabilities.



As a result of the Filing, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a
debtor-in-possession, AWI may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Although a POR and Disclosure Statement have been filed with the
Court, implementation of the POR is subject to confirmation of the POR in accordance with the provisions of the Bankruptcy Code. AWI is unable to predict when and if the POR will be confirmed. Therefore, the timing and terms of a resolution of the
Chapter 11 Case remain uncertain. Further, a confirmed plan of reorganization could materially change the amounts and classifications reported in the consolidated financial statements.



Employee Relations



Approximately 33% of AHIs worldwide employees are represented by labor unions in the United States. At the time of this filing, all of these employees are working
under current collective bargaining agreements.



Financial Condition and
Liquidity



Armstrong had cash and cash equivalents of $425.9 million
and $380.0 million at September 30, 2003 and December 31, 2002, respectively. The ratio of current assets to current liabilities was 3.26 to 1 as of September 30, 2003, compared with 3.17 to 1 as of December 31, 2002.



Net cash provided by operating activities for the nine months ended September 30, 2003 was
$90.6 million compared to net cash provided by operations of $150.5 million for the comparable period in 2002. Decreased accounts payable, lower operating results (see Quarterly Comparison of Results of Operations), and increased
inventory were the primary contributors to the lower cash provided by operations.



Net cash used for investing activities was $41.8 million for the nine months ended September 30, 2003, compared to $61.3 million for the nine months ended September 30, 2002. The decrease in net cash used was primarily due to lower
purchases of fixed assets.



Net cash used for financing activities was $7.5
million for the nine months ended September 30, 2003 compared to net cash used for financing activities of $1.5 million for the nine months ended September 30, 2002. The increase was primarily due to payments on short term debt.



Short-term and long-term debt, excluding debt subject to compromise, was $55.0 million at
September 30, 2003, compared with $58.9 million at the end of 2002. All other outstanding prepetition long-term debt is owed by entities that filed for Chapter 11 protection, and therefore has been classified as liabilities subject to compromise at
September 30, 2003 and December 31, 2002.



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AHIs liquidity needs for operations vary throughout the year. Therefore, AHI retains lines of credit to draw upon
as needed to meet these needs. Additionally, AHI has letter of credit issuance capabilities under the DIP Facility. AHI believes that cash on hand and from operations, together with lines of credit and the DIP Facility, will be adequate to address
its foreseeable liquidity needs.



Asbestos-related Litigation



The following is a summary update of asbestos-related litigation; see
Item 3 of AHIs 2002 Form 10-K filing for additional information.



AWI,
the major operating subsidiary of AHI, is a defendant in personal injury cases and property damage cases related to asbestos containing products. On December 6, 2000, AWI filed a voluntary petition for relief (the Filing) under Chapter
11 of the U.S. Bankruptcy Code to use the court supervised reorganization process to achieve a resolution of the AWI asbestos liability.



AHI, and Armstrongs other subsidiaries, including Triangle Pacific Corp. (now Armstrong Wood Products Inc.), WAVE (Armstrongs ceiling grid systems joint
venture with Worthington Industries), Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating subsidiaries were not a part of the Filing. Asbestos-related claims against any of these non-debtor entities are not addressed in the Chapter
11 proceedings unless they are personal injury derivative liabilities of AWI.



Asbestos-Related Personal Injury Claims



Prior to filing for relief under the Bankruptcy Code, AWI was a member of the Center for Claims Resolution (the Center) which handled the defense and settlement of asbestos-related personal injury claims on behalf of its
members. The Center pursued broad-based settlements of asbestos-related personal injury claims under the Strategic Settlement Program (SSP) and had reached agreements with law firms that covered approximately 130,000 claims that named
AWI as a defendant.



Due to the Filing, holders of asbestos-related personal
injury claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments to the Center with respect to asbestos-related personal injury claims, including payments
pursuant to the outstanding SSP agreements. AWIs obligations with respect to payments called for under these settlements will be determined in its Chapter 11 Case.



A creditors committee representing the interests of asbestos personal injury claimants and an individual representing the interests of
future personal injury claimants have been appointed in the Chapter 11 Case. AWIs present and future asbestos liability will be addressed in its Chapter 11 Case rather than through the Center and a multitude of lawsuits in different
jurisdictions throughout the U.S. It is anticipated that all of AWIs current and future asbestos-related personal injury claims will be resolved in the Chapter 11 Case.



Asbestos-Related Personal Injury Liability



In March 2003, AWI filed an amended Plan of Reorganization and disclosure statement and in
May 2003, AWI filed a further amended Plan of Reorganization (POR). The POR represents the product of negotiations with and is supported by the Asbestos Personal Injury Claimants Committee, the Unsecured Creditors Committee
and the Future Claimants Representative. Based upon the events that occurred through early March 2003, management concluded that it could reasonably estimate its probable liability for AWIs current and future asbestos-related personal
injury claims. Accordingly, in the fourth quarter of 2002, AWI recorded a $2.5 billion charge to increase the liability. The recorded asbestos-related liability for personal injury claims of approximately $3.2 billion at September 30, 2003 and
December 31, 2002, which was treated as subject to compromise, represents the estimated amount of liability that is implied based upon the negotiated resolution reflected in the POR, the total consideration expected to be paid to the Asbestos PI
Trust pursuant to the POR and a recovery value percentage for the allowed claims of the Asbestos PI Trust that is equal to the estimated recovery value percentage for the allowed non-asbestos unsecured claims. Pursuant to the POR, all AWI current
and future asbestos-related personal injury claims against AWI and other protected parties, as defined by the POR, will be channeled to the Asbestos



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PI Trust for resolution and, upon emergence from Chapter 11, reorganized AWI will not have any responsibility for the claims or participate in their
resolution. Claims against non-debtor companies, including Armstrong domestic and foreign subsidiaries, will not be channeled to the Asbestos PI Trust unless they are derivative liabilities of AWI. For a complete description of the protection from
asbestos claims, please read the POR.



It is anticipated that the Court will
hold a hearing to consider confirmation of the POR on November 17 and 18, 2003. However, AWI is unable to predict when and if this POR will be confirmed. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long
as this uncertainty exists, future changes to the recorded liability are possible and could be material to AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future
developments in the Chapter 11 Case and make changes to the recorded liability if and when it is appropriate.



The $2.5 billion, fourth quarter 2002, charge to increase the asbestos-related personal injury liability was before recognition of gains from the settlement of liabilities subject to compromise, which will arise at a
later date as a consequence of the Chapter 11 process.



Collateral Requirements



During 2000, AWI had secured a bond
for $56.2 million to meet minimum collateral requirements established by the Center with respect to asbestos-related personal injury claims asserted against AWI. On October 27, 2000, the insurance company that underwrote the surety bond informed AWI
and the Center of its intention not to renew the surety bond effective February 28, 2001. On February 6, 2001, the Center advised the surety of the Centers demand for payment of the face value of the bond. The surety filed a motion with the
Court seeking to restrain the Center from drawing on the bond. The motion was not granted. On March 28, 2001, the surety filed an amended complaint in the Court seeking similar relief. In addition, on April 27, 2001, AWI filed a complaint and a
motion with the Court seeking an order, among other things, enjoining the Center from drawing on the bond or, in the event the Center is permitted to draw on the bond, requiring that the proceeds of any such draw be deposited into a Court-approved
account subject to further order of the Court. Judge Alfred M. Wolin of the Federal District Court for the District of New Jersey (the District Court), who is also presiding over AWIs Chapter 11 Case, indicated he would determine
these matters. In the spring of 2002, the surety and the Center agreed to voluntarily dismiss the suretys complaint against the Center in light of AWIs filing of its complaint. The parties filed cross-motions for summary judgment with
respect to the issue of whether the Center is entitled to draw on the surety bond. On March 28, 2003, the District Court granted in part the Centers motion for summary judgment, and rejected certain defenses to the Centers attempt to
draw on the surety bond. The District Court further ruled that the surety bond did not cover settlements with asbestos claimants that were not documented as of the Filing. On April 7, 2003, the Center filed a motion to vacate that portion of the
District Courts opinion that ruled that the surety bond does not cover any settlement not documented as of the Filing. On July 9, 2003, the District Court granted AWIs motion for summary judgment in favor of AWI, dismissing the
Centers claims against AWI on the basis that the surety bond is unenforceable. During October 2003, AWI, the Asbestos Personal Injury Claimants Committee and the Unsecured Creditors Committee reached an agreement to settle claims
from the Center and the surety bond insurance company. As a result, AWI recorded $8.0 million in the third quarter of 2003 as a charge for asbestos liability, net.



Asbestos-Related Property Damage Litigation



Over the years, AWI was one of many defendants in asbestos-related property damage claims
that were filed by public and private building owners, with six claims pending as of June 30, 2001. The claims that were resolved prior to the Filing resulted in aggregate indemnity obligations of less than $10 million, which were entirely covered
by insurance



The commencement of any new asbestos property damage actions are
stayed due to the Filing. A separate creditors committee representing the interests of property damage asbestos claimants was appointed in the Chapter 11 Case. Approximately 600 proofs of claim were filed with the Court in response to the
March 1, 2002 bar date for asbestos-related property damage claims. See Note 3 for



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further discussion. As part of determining whether AWI asbestos containing resilient floor covering products give rise to property damage liability, the
Court conducted an initial hearing on September 26  27, 2002 to decide the type of scientific testing allowable under the Federal Rules of Evidence to prove or disprove whether such products cause building contamination. On October 22, 2002,
the Court granted AWIs requested relief and ruled that the methodology offered by the Asbestos Property Damage Committee in support of its claims is not a scientifically valid method of quantifying the level of asbestos contamination in a
building. On November 1, 2002, the Court directed that all property damage claimants provide, in support of their claims, substantiation that Armstrong flooring products were used in the claimants buildings. The Courts deadline for
submission of such product identification documentation was February 10, 2003. During the first six months of 2003, AWI settled all of the approximately 460 remaining property damage claims that alleged damages of $800 million, for approximately $9
million. Payments to claimants were made during the third quarter of 2003 and were funded by insurance. Based on the settlement of all remaining asbestos-related property damage claims, the Asbestos Property Damage Committee has been disbanded.



Insurance Recovery Proceedings



A substantial portion of AWIs primary and excess remaining insurance
asset is nonproducts (general liability) insurance for personal injury claims, including among others, those that involve alleged exposure during AWIs installation of asbestos insulation materials. AWI has entered into settlements with a
number of the carriers resolving its coverage issues. However, an alternative dispute resolution (ADR) procedure was commenced against certain carriers to determine the percentage of resolved and unresolved claims that are nonproducts
claims, to establish the entitlement to such coverage and to determine whether and how much reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is substantial and includes
defense costs in addition to limits.



During 1999, AWI received preliminary
decisions in the initial phases of the trial proceeding of the ADR, which were generally favorable to AWI on a number of issues related to insurance coverage. However, during the first quarter of 2001, a new trial judge was selected for the ADR. The
new trial judge conducted hearings in 2001 and determined not to rehear matters decided by the previous judge. In the first quarter of 2002, the new trial judge concluded the ADR trial proceeding with findings in favor of AWI on substantially all
key issues. Liberty Mutual, the only insurer that is still a party to the ADR, appealed that final judgment. Appellate argument was held on March 11, 2003. On July 30, 2003, the appellate arbitrators ruled that AWIs claims against certain
Liberty Mutual policies were barred by the statute of limitations. The ruling did not address the merits of any of the other issues Liberty Mutual raised in its appeal. Based on that unfavorable ruling, AWI concluded that $73 million of previously
recorded insurance assets were no longer probable of recovery. AWI was also ordered to reimburse Liberty Mutual for certain costs and administration fees that Liberty Mutual incurred during the ADR. The amount of these costs and fees are unknown and
AWI is currently unable to estimate the amount. Based upon an AWI request, the appellate panel has scheduled a rehearing for November 21, 2003.



In July 2002, AWI filed a lawsuit against Liberty Mutual in the Federal District Court for the Eastern District of Pennsylvania seeking, among other things, a declaratory
judgment with respect to certain policy issues not subject to binding ADR. The Federal District Court has not yet set a schedule to hear this matter.



One of the insurance carriers, Reliance Insurance Company, was placed under an order of liquidation by the Pennsylvania Insurance Department during October 2001 due to
financial difficulties. The order of liquidation prohibits Reliance from making any claim payments under the insurance policies until the liquidation occurs. AWI filed a proof of claim against Reliance during July 2003. It is uncertain when AWI will
receive proceeds from Reliance under these insurance policies.



Another
insurer, Century Indemnity Company, who previously settled its coverage issues with AWI, has made some of its required payments under the settlement to a trust of which AWI is a beneficiary. During January 2002, this insurer filed an adversary
action in AWIs Chapter 11 Case. Among other things, the action requests the Court to (1) declare that the settlement agreement is an executory contract and to compel assumption or rejection of the agreement; (2) declare that the insurer need
not make its present



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and future scheduled payments unless AWI assumes the agreement; (3) declare that the insurer is entitled to indemnification from AWI against any liabilities
that the insurer may incur in certain unrelated litigation in which the insurer is involved; and (4) enjoin the disposition of funds previously paid by the insurer to the trust pending an adjudication of the insurers rights. On October 7,
2003, the Court ruled that Century must pay the past due amounts plus interest. Century has appealed the Courts ruling.



On June 13, 2003, the New Hampshire Insurance Department placed The Home Insurance Company (Home) under an order of liquidation. Less than $10 million of
AWIs recorded insurance asset is based on policies with Home, which management believes is still probable of recovery. AWI intends to file a proof of claim against Home by the June 2004 deadline. It is uncertain when AWI will receive proceeds
from Home under these insurance policies.



Insurance Asset



An insurance asset in respect of asbestos
claims in the amount of $111.1 million is recorded as of September 30, 2003 compared to $198.1 million recorded at December 31, 2002. During the second quarter of 2003, AWI reduced its previously recorded insurance asset for asbestos-related
personal injury claims by $73 million reflecting managements current assessment of probable insurance recoveries in light of the ADR appellate panel decision. The $73 million was recorded as a charge for asbestos liability, net, in the
accompanying condensed consolidated statement of earnings. Also during the second quarter of 2003, the insurance asset was lowered by $14 million for asbestos-related personal injury insurance recoveries. Further, the insurance asset was increased
by $9 million to reflect agreements reached during the first half of 2003 for asbestos property damage claims. During the third quarter of 2003, AWI received $9.0 million of insurance proceeds related to the asbestos property damage claims.



Approximately $22.0 million of the total $111.1 million recorded insurance
asset at September 30, 2003 represents partial settlement for previous claims that will be paid in a fixed and determinable flow and is reported at its net present value discounted at 6.50%. The total amount recorded reflects AWIs belief that
insurance proceeds will be recovered in this amount, based upon AWIs success in insurance recoveries, settlement agreements that provide such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. Such
insurance is either available through settlement or probable of recovery through negotiation or litigation. Depending on further progress of the ADR, activities such as settlement discussions with insurance carriers party to the ADR and those not
party to the ADR, the final determination of coverage shared with ACandS (the former AWI insulation contracting subsidiary that was sold in August 1969 and which filed for relief under Chapter 11 of the Bankruptcy Code in September 2002) and the
financial condition of the insurers, AWI may revise its estimate of probable insurance recoveries. Approximately $79 million of the $111.1 million asset is determined from agreed coverage in place. Of the $111.1 million, $16.0 million has been
recorded as a current asset as of September 30, 2003 reflecting managements estimate of the minimum insurance payments to be received in the next 12 months. As of October 2003, approximately $8.0 million of the $16.0 million current asset is
past due. AWI believes collection of the full amount is still probable and therefore has not established a reserve against these receivables.



AWI believes that the process of pursuing disputed insurance coverage may result in additional settlement amounts than already recorded. However, many uncertainties
remain in this process, therefore, AWI did not increase the estimated insurance recovery asset in the fourth quarter of 2002, when it revised its recorded asbestos liability for personal injury claims by $2.5 billion.



Cash Flow Impact



As a result of the Chapter 11 Filing, AWI did not make any payments for asbestos-related
personal injury claims in the first nine months of 2003 or 2002. During the first nine months of 2003 and 2002, AWI received asbestos-related personal injury insurance recoveries of $14.0 million and $16.0 million, respectively. During the third
quarter of 2003, AWI paid $9.0 million for asbestos-related property damage claims and received $9.0 million of insurance proceeds related to these claims. During the pendency of the Chapter 11 Case, AWI does not expect to make any further cash
payments for asbestos-related claims, but AWI expects to continue to receive insurance proceeds under the terms of various settlement agreements. Management estimates that the timing of future cash recoveries of the recorded asset may extend beyond
10 years.



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Potential Legislation



The media has been reporting that progress is being made among some industry groups,
insurers, labor unions and members of the United States Congress, on agreeing to comprehensive legislation to resolve asbestos litigation issues through a proposed national privately funded trust. While the United States Senate Judiciary Committee
reached an agreement on a proposed bill in July 2003, negotiations continue on a final bill to submit for consideration by the full Senate. There is uncertainty as to whether this or any other proposal will become law, and what impact, if any, there
might be on AWIs asbestos liability and/or AWIs Chapter 11 Case. Prior efforts to enact asbestos legislation have not been successful.



Conclusion



Many uncertainties continue to exist about the matters impacting AWIs asbestos-related liability and insurance asset. These uncertainties include the impact of the
Filing and the Chapter 11 process, the number of future claims to be filed, the ultimate value of the asbestos liability, the impact of any potential legislation, the impact of the ADR proceedings on the insurance asset and the financial condition
of AWIs insurance carriers. During 2003, AWI has not revised its previously recorded liability for asbestos-related personal injury claims. However, during the second quarter of 2003, AWI reduced its previously recorded insurance asset for
asbestos-related personal injury claims by $73 million reflecting managements current assessment of probable insurance recoveries based on the unfavorable ruling by the ADR appellate panel.



Additionally, although a POR and Disclosure Statement have been filed with the Court and
submitted for voting by creditors, implementation of the POR is subject to the creditors vote and confirmation of the POR in accordance with the provisions of the Bankruptcy Code. AWI is unable to predict when and if the POR will be confirmed.
Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded liability and insurance asset are possible and could be material to AWIs financial
position and the results of its operations. Management will continue to review the recorded liability and insurance asset in light of future developments in the Chapter 11 Case and make changes to the recorded amounts if and when it is appropriate.



Quarterly Comparison of Results of Operations for 2003 and 2002



References to performance excluding the effects of foreign exchange are
non-GAAP measures. Management believes that this information improves the comparability of business performance by excluding the impacts of changes in foreign exchange rates when translating comparable foreign currency amounts.



Consolidated Results of Operations



Net sales in the third quarter of 2003 of $851.4 million were 0.6% higher compared with net
sales of $846.5 million in the third quarter of 2002. Net sales increased in the Americas by 0.4%, in Europe by 1.4% and by $0.9 million in the Pacific Area. Excluding the favorable effects of foreign exchange rates of $28.2 million, consolidated
net sales decreased by 2.7%, primarily due to lower sales volume, with Europe net sales decreasing by 10.5% and Pacific Area net sales decreasing by $0.5 million. See Segment Results for further discussion.



Cost of goods sold for the third quarter of 2003 was 79.6% of net sales, compared to 75.7%
for the third quarter of 2002. This percent increase was primarily due to costs related to the closing of a Wood Flooring facility, higher raw material costs (particularly lumber and natural gas), costs related to exiting a product line, higher
costs of foreign sourced products and a decreased U. S. pension credit. See Segment Results for further discussion.



Selling, general and administrative expenses (SG&A) in the third quarter of 2003 were $151.1 million or 17.7% of net sales, compared to $160.0 million or 18.9% of net
sales in the third quarter of 2002. The reduction in SG&A was primarily due to lower selling and advertising costs and lower estimated employee



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bonus accruals. Offsetting the lower costs were a decreased U.S. pension credit, $2.8 million impairment of an office building determined to be held for
sale, a $2.4 million charge for some environmental liabilities (see Note 11. Litigation and Other Matters, Environmental Liabilities) and increased non-restructuring severance costs.



Armstrong recorded an $8.0 million charge for asbestos liability, net related to an asbestos
related claim settlement. See preceding section, Asbestos-related Litigation, for further discussion.



Armstrong recorded a restructuring charge of $3.7 million in the third quarter of 2003. The charge related to severance benefits for approximately 72 employees in a
Textiles and Sports Flooring plant in the Netherlands, as part of the continuing 2002 restructuring plan to consolidate certain functions in the European flooring business. The initiatives recorded in the first nine months of 2003 under this
restructuring plan are expected to result in $6.0 million of annual savings. Separately, $0.8 million of the remaining reserve related to a noncancelable operating lease in the U.K. was reversed in the Unallocated Corporate segment as a result of
reaching agreement with outside parties on future rent increases and disputed rent payments by a sublessee. $0.2 million of the remaining accruals from the second quarter 2003 and second quarter 2002 charges in the Resilient Flooring segment was
also reversed, comprising certain severance accruals that were no longer necessary. Comparatively, in the third quarter of 2002, Armstrong reversed $0.6 million of restructuring costs relating to prior period charges in the Textiles and Sports
Flooring segment, comprising certain severance accruals that were no longer necessary.



Operating income in the third quarter of 2003 was $17.8 million, compared to $52.4 million in the third quarter of 2002. The decrease in operating income from 2002 is primarily related to $26.0 million of costs associated with closing
certain manufacturing facilities and ceasing production of a Resilient Flooring product line. Also contributing to the decrease were the effects of lower sales, higher raw material costs, an $8.0 million charge related to an asbestos related claim
settlement (see Asbestos-related Litigation), and a $6.8 million decreased U. S. pension credit, which were partially offset by reductions in SG&A expenses. Operating income for the third quarter of 2003 benefited by approximately
$1.1 million due to the effect of foreign exchange rates.



Interest expense of
$2.7 million in the third quarter of 2003, compared to $3.7 million in the third quarter of 2002, with the change primarily due to lower amortization of fees associated with the DIP Facility and less debt outstanding during the quarter. In
accordance with SOP 90-7, Armstrong has not recorded contractual interest expense on prepetition debt after the Chapter 11 filing date. This unrecorded interest expense was $24.9 million in the third quarters of 2003 and 2002.



Other non-operating expense was $4.5 million in the third quarter of 2003, compared to $0.8
million for the third quarter of 2002. 2003 included a $2.1 million impairment of a receivable related to a 2000 divestiture and $1.2 million of foreign exchange related costs. Other non-operating income was $1.0 million in the third quarter of 2003
compared to $1.2 million or the third quarter of 2002. The decrease was due to lower interest income.



Armstrong recorded $6.3 million of Chapter 11 reorganization costs, net in the third quarter of 2003, compared to a net expense of $6.6 million in the third quarter of 2002. See Proceedings under Chapter
11 for further discussion.



The effective tax rate for the third quarter
of 2003 was 188.7% versus 30.8% for the third quarter of 2002. The increase was primarily related to the impact of permanent differences (primarily Chapter 11 reorganization costs) on a significantly smaller amount of pre-tax earnings in 2003,
higher overall foreign tax rates caused by increased valuation allowances for foreign losses generated during 2003 and the favorable settlement of tax audits in 2002.



A net loss of $4.7 million was experienced in the third quarter of 2003, compared to net earnings of $29.4 million in the third quarter of
2002.



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Segment Results of Operations



Resilient Flooring



Resilient Flooring net sales were $315.6 million in the third quarter of 2003 and $315.1 million in the third quarter of 2002. 2003 sales compared to 2002 were favorably
impacted by $9.4 million from the effects of foreign exchange rates in translation. Americas net sales increased 1.7% primarily due to price gains and increased volume in certain products. Excluding the favorable effects of foreign exchange rates,
Europe decreased 14.4%, primarily due to the effects of weak European markets on volume, while the Pacific Area increased $0.1 million.



Operating income of $20.8 million in the third quarter of 2003 compared to $21.5 million in the third quarter of 2002. This decrease was primarily due to $5.4 million of
costs related to ceasing production of its residential stencil product line and overall lower sales volume, offset by lower selling and advertising expenses.



Wood Flooring



Wood Flooring net sales of $183.7 million in the third quarter of 2003 increased from net sales of $180.3 million in the third quarter of 2002. This 1.9% increase was
driven primarily by improved pricing and increased volume in certain products.



In July 2003, AHI announced its plans to close the Wood Flooring manufacturing location in Port Gibson, Mississippi, effective September 2003, due to excess production capacity. The production has been transferred to another Wood Flooring
location, resulting in a net reduction of approximately 145 positions. Charges of $15.6 million, primarily related to accelerated depreciation, were recorded in the third quarter of 2003.



An operating loss of $9.9 million was experienced in the third quarter of 2003, compared to operating income of $10.0 million in the third
quarter of 2002. The decrease in operating results primarily resulted from the closing of the Port Gibson facility (described above), increases in lumber and manufacturing costs and a $2.0 million impairment of the office building determined to be
held for sale, partially offset by lower selling expenses.



Textiles and Sports Flooring



Textiles
and Sports Flooring net sales of $73.3 million increased in the third quarter of 2003, compared to $68.6 million in the third quarter of 2002. Excluding the favorable effects of foreign exchange rates of $9.6 million, net sales decreased 6.3% due to
weak European markets.



Operating income of $0.2 million in the third quarter
of 2003, compared to an operating loss of $1.1 million in the third quarter of 2002. The increase in operating results was primarily due to lower selling and advertising costs and improved manufacturing costs, partially offset by lower sales volume.
2003 included a restructuring charge of $3.7 million, while 2002 included a $0.6 million restructuring reversal.



Building Products



Building Products net sales of $227.9 million in the third quarter of 2003 increased from $225.8 million in the third quarter of 2002. Excluding the favorable effects of
foreign exchange rates of $9.2 million, net sales decreased 3.0%, primarily due to lower sales volume in commercial markets, partially offset by improved pricing in the U.S. commercial market.



Operating income of $32.4 million in the third quarter of 2003, compared to $34.6 million in
the third quarter of 2002. This decrease resulted from lower sales volume and increased natural gas costs, partially offset by improved production expenses and improved pricing in the U.S. commercial market. Operating income for the third quarter of
2003 benefited by approximately $1.2 million due to the effect of foreign exchange rates.



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Cabinets



Cabinets net sales of $50.9 million in the third quarter of 2003 decreased from net sales of $56.7 million in the third quarter of 2002, due
primarily to reductions in volume.



An operating loss of $3.2 million in the
third quarter of 2003 compared to an operating loss of $0.3 million in the third quarter of 2002. This decrease in operating results was primarily due to the negative effects of lower net sales. Additionally, Cabinets recorded a $0.8 million
impairment related to the office building determined to be held for sale.



All Other



The All Other segment
contributed operating income of $0.5 million for the third quarters of 2003 and 2002, reflecting the equity investment in Interface Solutions, Inc.



Unallocated Corporate Expense



Unallocated corporate expense of $23.0 million in the third quarter of 2003 increased from $12.8 million in the third quarter of 2002 primarily due to an $8.0 million
charge related to an asbestos claim settlement (see Asbestos-related Litigation), a $6.8 million decreased U.S. pension credit, and a $2.4 million charge for some environmental liabilities (see Note 11. Litigation and Other
Matters, Environmental Liabilities), partially offset by reductions in estimated employee bonus accruals and reduced advertising expenses.



Nine Months Ending September 30 Comparison of 2003 and 2002



Net sales for the first nine months of 2003 of $2,453.2 million were 1.4% higher compared with net sales of $2,420.2 million for the first nine months of 2002. Resilient
Flooring net sales increased 1.1%. Wood Flooring net sales increased by 0.2%. Textiles and Sports Flooring increased by 10.8%. Building Products net sales increased by 4.0%. Cabinets decreased by 13.1%. Net sales in the Americas decreased 0.9%.
Excluding the favorable effects of foreign exchange rates of $105.6 million, consolidated net sales decreased 2.9%, with European net sales decreasing by 8.1% and Pacific Area net sales increasing by $4.1 million.



An operating loss of $4.3 million was experienced for the first nine months of 2003, compared
to operating income of $148.5 million for the first nine months of 2002. This decline in operating results was primarily due to $81.0 million of asbestos-related charges (see Asbestos-related Litigation), lower sales volume, increased
raw material costs, $26.0 million of costs associated with closing certain manufacturing facilities and ceasing production of a Resilient Flooring product line, and a $20.3 million decreased U.S. pension credit. These decreases were partially offset
by lower SG&A expenses. Operating income for the first nine months of 2003 benefited by approximately $1.8 million due to the effect of foreign exchange rates.



As discussed in Armstrongs 10-K for 2002, the German government was considering tax legislation which would have limited
Armstrongs ability to utilize tax loss carryforwards in Germany. The legislation adopted on April 11, 2003 excluded the items which would have potentially impaired Armstrongs German deferred tax assets.



The 2002 cumulative effect of a change in accounting principle of $593.8 million (net of $2.2
million tax) was due to a non-cash transitional impairment charge related to goodwill and one trademark in the Wood Flooring segment in accordance with FAS 142.



A net loss of $37.1 million was recorded for the first nine months of 2003, compared to a net loss of $514.8 million in the first nine months of 2002.



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Item 3. Quantitative and Qualitative Disclosures and Market Risk



For information regarding our exposure to certain market risks, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in AHIs 2002 Form 10-K filing. There have been no significant
changes in our financial instruments or market risk exposures from the amounts and descriptions disclosed therein.



Item 4. Controls and Procedures



As of
September 30, 2003, AHI and AWI (together referred to as the Companies) carried out an evaluation, under the supervision and with the participation of the Companies management, including the Companies Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of the Companies disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Companies disclosure controls and procedures are effective.



There were no significant changes in the Companies internal controls or in other factors that could significantly affect these controls subsequent to the date of our most recent evaluation.



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PART II  OTHER INFORMATION



Item 1. Legal Proceedings



ASBESTOS-RELATED LITIGATION



The
following is a summary update of asbestos-related litigation; see Item 3 of AHIs 2002 Form 10-K filing for additional information.



AWI, the major operating subsidiary of AHI, is a defendant in personal injury cases and property damage cases related to asbestos containing products. On December 6,
2000, AWI filed a voluntary petition for relief (the Filing) under Chapter 11 of the U.S. Bankruptcy Code to use the court supervised reorganization process to achieve a resolution of the AWI asbestos liability.



AHI, and Armstrongs other subsidiaries, including Triangle Pacific Corp. (now Armstrong
Wood Products Inc.), WAVE (Armstrongs ceiling grid systems joint venture with Worthington Industries), Armstrong Canada, Armstrong DLW AG and its other non-U.S. operating subsidiaries were not a part of the Filing. Asbestos-related claims
against any of these non-debtor entities are not addressed in the Chapter 11 proceedings unless they are personal injury derivative liabilities of AWI.



Asbestos-Related Personal Injury Claims



Prior to filing for relief under the Bankruptcy Code, AWI was a member of the Center for Claims Resolution (the Center) which handled the defense and
settlement of asbestos-related personal injury claims on behalf of its members. The Center pursued broad-based settlements of asbestos-related personal injury claims under the Strategic Settlement Program (SSP) and had reached agreements
with law firms that covered approximately 130,000 claims that named AWI as a defendant.



Due to the Filing, holders of asbestos-related personal injury claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments to the Center with
respect to asbestos-related personal injury claims, including payments pursuant to the outstanding SSP agreements. AWIs obligations with respect to payments called for under these settlements will be determined in its Chapter 11 Case.



A creditors committee representing the interests of asbestos personal
injury claimants and an individual representing the interests of future personal injury claimants have been appointed in the Chapter 11 Case. AWIs present and future asbestos liability will be addressed in its Chapter 11 Case rather than
through the Center and a multitude of lawsuits in different jurisdictions throughout the U.S. It is anticipated that all of AWIs current and future asbestos-related personal injury claims will be resolved in the Chapter 11 Case.



Asbestos-Related Personal Injury Liability



In March 2003, AWI filed an amended Plan of Reorganization and disclosure
statement and in May 2003, AWI filed a further amended Plan of Reorganization (POR). The POR represents the product of negotiations with and is supported by the Asbestos Personal Injury Claimants Committee, the Unsecured
Creditors Committee and the Future Claimants Representative. Based upon the events that occurred through early March 2003, management concluded that it could reasonably estimate its probable liability for AWIs current and future
asbestos-related personal injury claims. Accordingly, in the fourth quarter of 2002, AWI recorded a $2.5 billion charge to increase the liability. The recorded asbestos-related liability for personal injury claims of approximately $3.2 billion at
September 30, 2003 and December 31, 2002, which was treated as subject to compromise, represents the estimated amount of liability that is implied based upon the negotiated resolution reflected in the POR, the total consideration expected to be paid
to the Asbestos PI Trust pursuant to the POR and a recovery value percentage for the allowed claims of the Asbestos PI Trust that is equal to the estimated recovery value percentage for the allowed non-asbestos unsecured claims. Pursuant to the POR,
all AWI current and future asbestos-related personal injury claims against AWI and other protected parties, as defined by the POR, will be channeled to the Asbestos



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PI Trust for resolution and, upon emergence from Chapter 11, reorganized AWI will not have any responsibility for the claims or participate in their
resolution. Claims against non-debtor companies, including Armstrong domestic and foreign subsidiaries, will not be channeled to the Asbestos PI Trust unless they are derivative liabilities of AWI. For a complete description of the protection from
asbestos claims, please read the POR.



It is anticipated that the Court will
hold a hearing to consider confirmation of the POR on November 17 and 18, 2003. However, AWI is unable to predict when and if this POR will be confirmed. Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long
as this uncertainty exists, future changes to the recorded liability are possible and could be material to AWIs financial position and the results of its operations. Management will continue to review the recorded liability in light of future
developments in the Chapter 11 Case and make changes to the recorded liability if and when it is appropriate.



The $2.5 billion, fourth quarter 2002, charge to increase the asbestos-related personal injury liability was before recognition of gains from the settlement of liabilities subject to compromise, which will arise at a
later date as a consequence of the Chapter 11 process.



Collateral Requirements



During 2000, AWI had secured a bond
for $56.2 million to meet minimum collateral requirements established by the Center with respect to asbestos-related personal injury claims asserted against AWI. On October 27, 2000, the insurance company that underwrote the surety bond informed AWI
and the Center of its intention not to renew the surety bond effective February 28, 2001. On February 6, 2001, the Center advised the surety of the Centers demand for payment of the face value of the bond. The surety filed a motion with the
Court seeking to restrain the Center from drawing on the bond. The motion was not granted. On March 28, 2001, the surety filed an amended complaint in the Court seeking similar relief. In addition, on April 27, 2001, AWI filed a complaint and a
motion with the Court seeking an order, among other things, enjoining the Center from drawing on the bond or, in the event the Center is permitted to draw on the bond, requiring that the proceeds of any such draw be deposited into a Court-approved
account subject to further order of the Court. Judge Alfred M. Wolin of the Federal District Court for the District of New Jersey (the District Court), who is also presiding over AWIs Chapter 11 Case, indicated he would determine
these matters. In the spring of 2002, the surety and the Center agreed to voluntarily dismiss the suretys complaint against the Center in light of AWIs filing of its complaint. The parties filed cross-motions for summary judgment with
respect to the issue of whether the Center is entitled to draw on the surety bond. On March 28, 2003, the District Court granted in part the Centers motion for summary judgment, and rejected certain defenses to the Centers attempt to
draw on the surety bond. The District Court further ruled that the surety bond did not cover settlements with asbestos claimants that were not documented as of the Filing. On April 7, 2003, the Center filed a motion to vacate that portion of the
District Courts opinion that ruled that the surety bond does not cover any settlement not documented as of the Filing. On July 9, 2003, the District Court granted AWIs motion for summary judgment in favor of AWI, dismissing the
Centers claims against AWI on the basis that the surety bond is unenforceable. During October 2003, AWI, the Asbestos Personal Injury Claimants Committee and the Unsecured Creditors Committee reached an agreement to settle claims
from the Center and the surety bond insurance company. As a result, AWI recorded $8.0 million in the third quarter of 2003 as a charge for asbestos liability, net.



Asbestos-Related Property Damage Litigation



Over the years, AWI was one of many defendants in asbestos-related property damage claims
that were filed by public and private building owners, with six claims pending as of June 30, 2001. The claims that were resolved prior to the Filing resulted in aggregate indemnity obligations of less than $10 million, which were entirely covered
by insurance



The commencement of any new asbestos property damage actions are
stayed due to the Filing. A separate creditors committee representing the interests of property damage asbestos claimants was appointed in the Chapter 11 Case. Approximately 600 proofs of claim were filed with the Court in response to the
March 1, 2002 bar date for asbestos-related property damage claims. See Note 3 for



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further discussion. As part of determining whether AWI asbestos containing resilient floor covering products give rise to property damage liability, the
Court conducted an initial hearing on September 26  27, 2002 to decide the type of scientific testing allowable under the Federal Rules of Evidence to prove or disprove whether such products cause building contamination. On October 22, 2002,
the Court granted AWIs requested relief and ruled that the methodology offered by the Asbestos Property Damage Committee in support of its claims is not a scientifically valid method of quantifying the level of asbestos contamination in a
building. On November 1, 2002, the Court directed that all property damage claimants provide, in support of their claims, substantiation that Armstrong flooring products were used in the claimants buildings. The Courts deadline for
submission of such product identification documentation was February 10, 2003. During the first six months of 2003, AWI settled all of the approximately 460 remaining property damage claims that alleged damages of $800 million, for approximately $9
million. Payments to claimants were made during the third quarter of 2003 and were funded by insurance. Based on the settlement of all remaining asbestos-related property damage claims, the Asbestos Property Damage Committee has been disbanded.



Insurance Recovery Proceedings



A substantial portion of AWIs primary and excess remaining insurance
asset is nonproducts (general liability) insurance for personal injury claims, including among others, those that involve alleged exposure during AWIs installation of asbestos insulation materials. AWI has entered into settlements with a
number of the carriers resolving its coverage issues. However, an alternative dispute resolution (ADR) procedure was commenced against certain carriers to determine the percentage of resolved and unresolved claims that are nonproducts
claims, to establish the entitlement to such coverage and to determine whether and how much reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is substantial and includes
defense costs in addition to limits.



During 1999, AWI received preliminary
decisions in the initial phases of the trial proceeding of the ADR, which were generally favorable to AWI on a number of issues related to insurance coverage. However, during the first quarter of 2001, a new trial judge was selected for the ADR. The
new trial judge conducted hearings in 2001 and determined not to rehear matters decided by the previous judge. In the first quarter of 2002, the new trial judge concluded the ADR trial proceeding with findings in favor of AWI on substantially all
key issues. Liberty Mutual, the only insurer that is still a party to the ADR, appealed that final judgment. Appellate argument was held on March 11, 2003. On July 30, 2003, the appellate arbitrators ruled that AWIs claims against certain
Liberty Mutual policies were barred by the statute of limitations. The ruling did not address the merits of any of the other issues Liberty Mutual raised in its appeal. Based on that unfavorable ruling, AWI concluded that $73 million of previously
recorded insurance assets were no longer probable of recovery. AWI was also ordered to reimburse Liberty Mutual for certain costs and administration fees that Liberty Mutual incurred during the ADR. The amount of these costs and fees are unknown and
AWI is currently unable to estimate the amount. Based upon an AWI request, the appellate panel has scheduled a rehearing for November 21, 2003.



In July 2002, AWI filed a lawsuit against Liberty Mutual in the Federal District Court for the Eastern District of Pennsylvania seeking, among other things, a declaratory
judgment with respect to certain policy issues not subject to binding ADR. The Federal District Court has not yet set a schedule to hear this matter.



One of the insurance carriers, Reliance Insurance Company, was placed under an order of liquidation by the Pennsylvania Insurance Department during October 2001 due to
financial difficulties. The order of liquidation prohibits Reliance from making any claim payments under the insurance policies until the liquidation occurs. AWI filed a proof of claim against Reliance during July 2003. It is uncertain when AWI will
receive proceeds from Reliance under these insurance policies.



Another
insurer, Century Indemnity Company, who previously settled its coverage issues with AWI, has made some of its required payments under the settlement to a trust of which AWI is a beneficiary. During January 2002, this insurer filed an adversary
action in AWIs Chapter 11 Case. Among other things, the action requests the Court to (1) declare that the settlement agreement is an executory contract and to compel assumption or rejection of the agreement; (2) declare that the insurer need
not make its present



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and future scheduled payments unless AWI assumes the agreement; (3) declare that the insurer is entitled to indemnification from AWI against any liabilities
that the insurer may incur in certain unrelated litigation in which the insurer is involved; and (4) enjoin the disposition of funds previously paid by the insurer to the trust pending an adjudication of the insurers rights. On October 7,
2003, the Court ruled that Century must pay the past due amounts plus interest. Century has appealed the Courts ruling.



On June 13, 2003, the New Hampshire Insurance Department placed The Home Insurance Company (Home) under an order of liquidation. Less than $10 million of
AWIs recorded insurance asset is based on policies with Home, which management believes is still probable of recovery. AWI intends to file a proof of claim against Home by the June 2004 deadline. It is uncertain when AWI will receive proceeds
from Home under these insurance policies.



Insurance Asset



An insurance asset in respect of asbestos
claims in the amount of $111.1 million is recorded as of September 30, 2003 compared to $198.1 million recorded at December 31, 2002. During the second quarter of 2003, AWI reduced its previously recorded insurance asset for asbestos-related
personal injury claims by $73 million reflecting managements current assessment of probable insurance recoveries in light of the ADR appellate panel decision. The $73 million was recorded as a charge for asbestos liability, net, in the
accompanying condensed consolidated statement of earnings. Also during the second quarter of 2003, the insurance asset was lowered by $14 million for asbestos-related personal injury insurance recoveries. Further, the insurance asset was increased
by $9 million to reflect agreements reached during the first half of 2003 for asbestos property damage claims. During the third quarter of 2003, AWI received $9.0 million of insurance proceeds related to the asbestos property damage claims.



Approximately $22.0 million of the total $111.1 million recorded insurance
asset at September 30, 2003 represents partial settlement for previous claims that will be paid in a fixed and determinable flow and is reported at its net present value discounted at 6.50%. The total amount recorded reflects AWIs belief that
insurance proceeds will be recovered in this amount, based upon AWIs success in insurance recoveries, settlement agreements that provide such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. Such
insurance is either available through settlement or probable of recovery through negotiation or litigation. Depending on further progress of the ADR, activities such as settlement discussions with insurance carriers party to the ADR and those not
party to the ADR, the final determination of coverage shared with ACandS (the former AWI insulation contracting subsidiary that was sold in August 1969 and which filed for relief under Chapter 11 of the Bankruptcy Code in September 2002) and the
financial condition of the insurers, AWI may revise its estimate of probable insurance recoveries. Approximately $79 million of the $111.1 million asset is determined from agreed coverage in place. Of the $111.1 million, $16.0 million has been
recorded as a current asset as of September 30, 2003 reflecting managements estimate of the minimum insurance payments to be received in the next 12 months. As of October 2003, approximately $8.0 million of the $16.0 million current asset is
past due. AWI believes collection of the full amount is still probable and therefore has not established a reserve against these receivables.



AWI believes that the process of pursuing disputed insurance coverage may result in additional settlement amounts than already recorded. However, many uncertainties
remain in this process, therefore, AWI did not increase the estimated insurance recovery asset in the fourth quarter of 2002, when it revised its recorded asbestos liability for personal injury claims by $2.5 billion.



Cash Flow Impact



As a result of the Chapter 11 Filing, AWI did not make any payments for asbestos-related
personal injury claims in the first nine months of 2003 or 2002. During the first nine months of 2003 and 2002, AWI received asbestos-related personal injury insurance recoveries of $14.0 million and $16.0 million, respectively. During the third
quarter of 2003, AWI paid $9.0 million for asbestos-related property damage claims and received $9.0 million of insurance proceeds related to these claims. During the pendency of the Chapter 11 Case, AWI does not expect to make any further cash
payments for asbestos-related claims, but AWI expects to continue to receive insurance proceeds under the terms of various settlement agreements. Management estimates that the timing of future cash recoveries of the recorded asset may extend beyond
10 years.



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Potential Legislation



The media has been reporting that progress is being made among some industry groups,
insurers, labor unions and members of the United States Congress, on agreeing to comprehensive legislation to resolve asbestos litigation issues through a proposed national privately funded trust. While the United States Senate Judiciary Committee
reached an agreement on a proposed bill in July 2003, negotiations continue on a final bill to submit for consideration by the full Senate. There is uncertainty as to whether this or any other proposal will become law, and what impact, if any, there
might be on AWIs asbestos liability and/or AWIs Chapter 11 Case. Prior efforts to enact asbestos legislation have not been successful.



Conclusion



Many uncertainties continue to exist about the matters impacting AWIs asbestos-related liability and insurance asset. These uncertainties include the impact of the
Filing and the Chapter 11 process, the number of future claims to be filed, the ultimate value of the asbestos liability, the impact of any potential legislation, the impact of the ADR proceedings on the insurance asset and the financial condition
of AWIs insurance carriers. During 2003, AWI has not revised its previously recorded liability for asbestos-related personal injury claims. However, during the second quarter of 2003, AWI reduced its previously recorded insurance asset for
asbestos-related personal injury claims by $73 million reflecting managements current assessment of probable insurance recoveries based on the unfavorable ruling by the ADR appellate panel.



Additionally, although a POR and Disclosure Statement have been filed with the Court and
submitted for voting by creditors, implementation of the POR is subject to the creditors vote and confirmation of the POR in accordance with the provisions of the Bankruptcy Code. AWI is unable to predict when and if the POR will be confirmed.
Therefore, the timing and terms of resolution of the Chapter 11 Case remain uncertain. As long as this uncertainty exists, future changes to the recorded liability and insurance asset are possible and could be material to AWIs financial
position and the results of its operations. Management will continue to review the recorded liability and insurance asset in light of future developments in the Chapter 11 Case and make changes to the recorded amounts if and when it is appropriate.



NON-CHAPTER 11 ASBESTOS-RELATED
LITIGATION



Historically, Armstrong non-debtor companies, including
Armstrong domestic and foreign subsidiaries, have been involved in defending and resolving some third party and other asbestos-related claims. Currently, an Armstrong domestic non-debtor subsidiary is a defendant in two third party asbestos-related
litigation matters pending in California state court. It is asserted that the plaintiffs were exposed to asbestos for many years in various occupations, including while aboard various ships in the 1940s , and as a result contracted various
asbestos-related diseases. It is alleged that the Armstrong subsidiary is a successor in interest to a company that, at certain times, allegedly owned some of these vessels. The cases have multiple defendants. Another case that was
scheduled for trial in November 2003 has been dismissed. Armstrong denies liability and is aggressively defending the matters. Armstrong has not recorded any liability for these matters. Management does not expect that any sum that may have to be
paid in connection with these two matters will have a material adverse effect on its consolidated results of operations or liquidity.



ENVIRONMENTAL LIABILITIES



Most of Armstrongs manufacturing and certain of Armstrongs research facilities are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment. Armstrong has made, and intends to continue to make, necessary expenditures for compliance with applicable environmental requirements at its operating facilities. Armstrong
anticipates that annual expenditures for those purposes will not change materially from recent experience. However, applicable environmental laws continue to change. As a result of continuous changes in regulatory requirements, Armstrong cannot
predict with certainty future capital expenditures associated with compliance with environmental requirements.



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Armstrong is involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act
(Superfund), and similar state laws at approximately 24 sites. In most cases, Armstrong is one of many potentially responsible parties (PRPs) which have potential liability for the required investigation and remediation of
each site and which, in some cases, have agreed to jointly fund that required investigation and remediation. With regard to some sites, however, Armstrong disputes the liability, the proposed remedy or the proposed cost allocation among the PRPs.
Armstrong may have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies.



Armstrong has also been remediating environmental contamination resulting from past industrial activity at certain of its former plant sites. Estimates of
Armstrongs future environmental liability at the Superfund sites and current or former plant sites are based on evaluations of currently available facts regarding each individual site and consider factors such as Armstrongs activities in
conjunction with the site, existing technology, presently enacted laws and regulations and prior company experience in remediating contaminated sites. Although current law imposes joint and several liability on all parties at Superfund sites,
Armstrongs contribution to the remediation of these sites is expected to be limited by the number of other companies also identified as potentially liable for site remediation. As a result, Armstrongs estimated liability reflects only
Armstrongs expected share. In determining the probability of contribution, Armstrong considers the solvency of the parties, whether liability is being disputed, the terms of any existing agreements and experience with similar matters. The
Chapter 11 Case also may affect the ultimate amount of such contributions.



AWIs payments and remediation work on such sites for which AWI is the potentially responsible party is under review in light of the Chapter 11 Filing. The bar date for claims from several environmental agencies expired during the
third quarter of 2003. AWI received an unliquidated proof of claim from the United States Environmental Protection Agency (EPA).



In July 2003, the EPA notified Armstrong, as a PRP at a particular Superfund site, of the EPAs estimate of the sites future cleanup costs, with its assessment
of AWIs share of the costs being a range of $17.8 million to $26.2 million. AWI is currently reviewing this matter but disputes the assessment.



Management is currently in discussions with the EPA to resolve the unliquidated proof of claim against AWI. Upon further analysis of the sites being discussed, management
estimated that AWIs probable share of the sites future cleanup costs is $3.1 million. AWI recorded a charge of $2.4 million within selling, general and administrative expense in the third quarter of 2003 to increase its liability to this
new estimate.



AWI is subject to a unilateral order by the Oregon Department of
Environmental Quality (DEQ) to conduct a remedial investigation and feasibility study and any necessary remedial design and action at its St. Helens, Oregon facility, as well as the adjacent Scappoose Bay. AWI has denied liability for
the Scappoose Bay, but has cooperated with the DEQ regarding its owned property. Other potentially responsible parties who are not yet subject to orders by the DEQ include former site owners Owens Corning (OC) and Kaiser Gypsum Company,
Inc. (Kaiser). AWI has entered into an agreement with Kaiser for the sharing of costs and responsibilities with respect to the remedial investigation, feasibility study and remedy selection at the site. OC has entered into a settlement
with the DEQ. Pursuant to the settlement, OC will make a lump sum payment to the DEQ in exchange for contribution protection (including protection against common law and statutory contribution claims by AWI against OC) and a covenant not to sue. AWI
has negotiated with the DEQ how these funds will be made available for the investigation and remedial action for the site. AWI has recorded an environmental liability with respect to the St. Helens remedial investigations and feasibility study at
its facility, but not for Scappoose Bay because AWI continues to dispute responsibility for any contamination in Scappoose Bay.



Liabilities of $23.6 million at September 30, 2003 and $21.2 million at December 31, 2002 were for potential environmental liabilities that Armstrong considers probable
and for which a reasonable estimate of the probable liability could be made. Where existing data is sufficient to estimate the liability, that estimate has been used; where only a range of probable liability is available and no amount within that



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range is more likely than any other, the lower end of the range has been used. As assessments and remediation activities progress at each site, these
liabilities are reviewed to reflect additional information as it becomes available. Due to the Chapter 11 Filing, $12.8 million of the September 30, 2003 and $11.4 million of the December 31, 2002 environmental liabilities are classified as
prepetition liabilities subject to compromise. As a general rule, the Chapter 11 process does not preserve company assets for such prepetition liabilities.



The estimated liabilities above do not take into account any claims for recoveries from insurance or third parties. Such recoveries, where probable, have been recorded as
an asset in the consolidated financial statements and are either available through settlement or anticipated to be recovered through negotiation or litigation. The amount of the recorded asset for estimated recoveries was $2.5 million and $3.3
million at September 30, 2003 and December 31, 2002, respectively.



Actual
costs to be incurred at identified sites may vary from the estimates, given the inherent uncertainties in evaluating environmental liabilities. Subject to the imprecision in estimating environmental remediation costs, Armstrong believes that any sum
it may have to pay in connection with environmental matters in excess of the amounts noted above would not have a material adverse effect on its financial condition, or liquidity, although the recording of future costs may be material to earnings in
such future period.



PATENT INFRINGEMENT
CLAIMS



Armstrong is a defendant in three related lawsuits claiming patent
infringement related to some of Armstrongs laminate products. The plaintiffs have claimed unspecified monetary damages. Armstrong is being defended and indemnified by its supplier for all costs and potential damages related to the litigation.



FORMER EMPLOYEES CLAIM



Former Armstrong employees that were separated from the company in two business divestitures
in 2000 brought two purported class actions against the Retirement Committee of AWI, certain current and former members of the Retirement Committee, the Retirement Savings and Stock Ownership Plan (RSSOP), AHI and the trustee bank of the RSSOP.
Plaintiffs alleged breach of Employee Retirement Income Security Act (ERISA) fiduciary duties and other violations of ERISA pertaining to losses in their RSSOP accounts, which were invested in Armstrong common stock.



An agreement was reached to settle this matter. Contributors to the settlement are AWI, its
insurer and the trustee bank of the RSSOP. The full amount of the settlement will be allocated among approximately 370 former employees. AWIs portion of the settlement is $1.0 million, which will be treated as convenience claims in the Chapter
11 Case. The settlement was approved by the Bankruptcy Court on March 31, 2003 and by the United States District Court (Eastern District of PA) on June 16, 2003. Based upon the Bankruptcy Courts approval of the settlement, AWI recorded a $1.0
million charge in the first quarter of 2003 as an other non-operating expense.



DEPARTMENT OF LABOR DISCUSSIONS



Subsequent to an audit by the United States Department of Labor (DOL), Armstrong was informed that the DOL was challenging the validity of the use of certain
contributions, in the approximate aggregate amount of $33.4 million, to fund debt payments made by the Armstrong Employee Stock Ownership Plan (ESOP), as provided for by that plan. Armstrong and the DOL reached a settlement to resolve
this matter with a funding to the ESOP of $1.5 million, which will be distributed to plan participants in accordance with terms of the agreement. Insurance and third parties will fund $0.9 million of the settlement. In the third quarter of 2003,
Armstrong recorded a liability of $1.5 million and a receivable of $0.9 million as a selling, general and administrative expense to represent Armstrongs $0.6 million funding of the settlement, which will be paid in the fourth quarter of 2003.



OTHER CLAIMS



Additionally, AHI, through AWI and AWIs subsidiaries, is involved in various other
claims and legal actions involving product liability, patent infringement, distributor termination, employment law issues and other actions arising in the ordinary course of business. While complete assurance cannot be given to the outcome of these
claims, AHI does not expect that any sum that may have to be paid in connection with these matters will have a materially adverse effect on its consolidated financial position or liquidity, however it could be material to the results of operations
in the particular period in which a matter is resolved.



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Item 6. Exhibits and Reports on Form 8-K



| | (a) | The following exhibits are filed as part of the Quarterly Report on Form 10-Q:
| | --- | ------------------------------------------------------------------------------



ExhibitsNo. 2(a)

Fourth Amended Plan of Reorganization submitted to the Court is incorporated by reference from the Form 8-K filed on May 23, 2003.No. 2(b)

Disclosure Statement submitted to the Court is incorporated by reference from the Form 8-K filed on May 23, 2003.No. 2(c)

Exhibits to the Fourth Amended Plan of Reorganization submitted to the Court are incorporated by reference from the Form 8-K filed on September 8, 2003.No. 2(d)

Armstrong Holdings, Inc. Plan of Dissolution, Winding Up and Distribution as approved by the Board on April 28, 2003 is incorporated by reference from Exhibit A to the Proxy
Statement of Armstrong Holdings, Inc. filed on October 16, 2003.No. 10

Form of Indemnification Agreement between Armstrong World Industries, Inc. and the following executive officers: L. A. Campanaro, D. G. Gordon, and B. M.
Sullivan.No. 15

Awareness Letter from Independent AccountantsNo. 31.1

Certification of Principal Executive Officer of Armstrong Holdings, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.No. 31.2

Certification of Principal Financial Officer of Armstrong Holdings, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.No. 31.3

Certification of Principal Executive Officer of Armstrong World Industries, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.No. 31.4

Certification of Principal Financial Officer of Armstrong World Industries, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.No. 32.1

Certification of Chief Executive Officer of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.No. 32.2

Certification of Chief Financial Officer of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002




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| | (b) | The following Current Reports were filed on Form 8-K since the second quarter of 2003.
| | --- | --------------------------------------------------------------------------------------



| | 1) | On July 31, 2003 a current report was filed under Item 5 of Form 8-K related to a press release dated July 30, 2003 regarding a change in the leadership of the Armstrong Flooring
Products operations.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | On August 11, 2003, a current report was furnished under Item 12 of Form 8-K related to a press release dated August 8, 2003 regarding financial results for the fiscal quarter ended
June 30, 2003.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | On September 2, 2003, a current report was filed under Item 5 of Form 8-K and Regulation FD related to the Courts approval of extending the deadline until October 17, 2003 for
creditors and claimants to vote on the Plan of Reorganization.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4) | On September 8, 2003, a current report was filed under Item 5 of Form 8-K and Regulation FD related to certain Exhibits to Armstrong World Industries, Inc.s Fourth Amended
Plan of Reorganization. A copy of the Fourth Amended Plan of Reorganization and a copy of the Disclosure Statement were filed on current report Form 8-K dated May 23, 2003. The exhibits to the plan filed with the Court include: (i) The form of the
articles of incorporation and bylaws for AWI as it will be reorganized under the plan, (ii) The form of stockholder and registration rights agreement, (iii) The form of warrant agreement with respect to the warrants to be issued under the plan to
Holdings, (iv) The form of the indentures for the three issues of notes of reorganized AWI which may be issued under the plan, and (v) The form of the long-term incentive plan to be established for management of the reorganized company.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5) | On October 13, 2003, a current report was filed under Item 5 of Form 8-K and Regulation FD related to the Courts approval of extending the deadline for creditors and claimants
to vote on the Plan of Reorganization. The voting deadline is October 31, 2003; it was previously October 17, 2003.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Signatures



Pursuant to the requirements of
the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Armstrong Holdings, Inc.Armstrong World Industries, Inc.By:

/s/ Leonard A. CampanaroLeonard A. Campanaro, Senior Vice President and Chief Financial OfficerBy:

/s/ John N. RigasJohn N. Rigas, Senior Vice President, Secretary and General CounselBy:

/s/ William C. RodruanWilliam C. Rodruan, Vice President and Controller (Principal Accounting Officer)




Date: October 30, 2003



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Exhibit Index



|Exhibit No. |  |                                                                                                                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            | 
|No. 2(a)    |  | Fourth Amended Plan of Reorganization submitted to the Court is incorporated by reference from the Form 8-K filed on May 23, 2003.                                                                                                            
|            | 
|No. 2(b)    |  | Disclosure Statement submitted to the Court is incorporated by reference from the Form 8-K filed on May 23, 2003.                                                                                                                             
|            | 
|No. 2(c)    |  | Exhibits to the Fourth Amended Plan of Reorganization submitted to the Court are incorporated by reference from the Form 8-K filed on September 8, 2003.                                                                                      
|            | 
|No. 2(d)    |  | Armstrong Holdings, Inc. Plan of Dissolution, Winding Up and Distribution as approved by the Board on April 28, 2003 is incorporated by reference from Exhibit A to the Proxy
Statement of Armstrong Holdings, Inc. filed on October 16, 2003.
|            | 
|No. 10      |  | Form of Indemnification Agreement between Armstrong World Industries, Inc. and the following executive officers: L. A. Campanaro, D. G. Gordon, and B. M.
Sullivan.                                                                           
|            | 
|No. 15      |  | Awareness Letter from Independent Accountants                                                                                                                                                                                                 
|            | 
|No. 31.1    |  | Certification of Principal Executive Officer of Armstrong Holdings, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                   
|            | 
|No. 31.2    |  | Certification of Principal Financial Officer of Armstrong Holdings, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                   
|            | 
|No. 31.3    |  | Certification of Principal Executive Officer of Armstrong World Industries, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.                           
|            | 
|No. 31.4    |  | Certification of Principal Financial Officer of Armstrong World Industries, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.                           
|            | 
|No. 32.1    |  | Certification of Chief Executive Officer of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.                           
|            | 
|No. 32.2    |  | Certification of Chief Financial Officer of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.